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The cloud wars are getting more intense. They are also leading to some interesting alliances among enemies. The aim: Dethrone Amazon (NASDAQ: AMZN ), whose AWS platform dominates the industry.
According to a report from TheInformation.com , it looks like Microsoft (NASDAQ: MSFT ) and VMware (NYSE: VMW ) are in the process of forming a strategic partnership. And yes, both companies have been fierce rivals for quite some time. Founded in the late 1990s, VMW pioneered virtualization. This innovative software made it possible to get more capacity from existing hardware resources, with the initial focus on Intel's (NASDAQ: INTC ) x86 server-based architecture. This was a revolutionary breakthrough as it led to large cost-savings for customers.
But for VMW, virtualization became a gateway to the valuable data center industry. The company was also able to leverage the technology into other important categories like the software-defined data center and hybrid clouds. Currently, the company has more than 500,000 customers, which include 100% of the Fortune 500.
As a result, growth has been strong over the years, which has made VMW stock a winner. During the past decade, the average annual return was 25.11%. The market value of VMW stock is now over $70 billion.
Now MSFT has developed its own virtualization systems. And while they did gain traction - the company's Hyper-V platform has 24% of the market, according to Datanyze.com - it has nonetheless been a challenge to unseat VMW's existing customers. Let's face it, when it comes to IT systems, there needs to be major reasons to make a switch.
Something else: VMW's datacenter technologies are not designed for easy integration with MSFT's cloud system, Azure. There is usually a need to rewrite code.
In light of all this, there is definitely a strong use-case for a Microsoft-VMware pairing. In fact, customers of both companies have been clamoring for one!
TheInformation notes that MSFT and VMW are working on new software that makes it much easier to transition VMWare private clouds to Microsoft's public cloud. All in all, this will allow customers to accelerate their digital transformations. This new software is expected to be announced in the "coming weeks."
Ok then, what does this mean for AWS? Could there be a threat here? Well, AWS remains the dominant cloud platform. Gartner estimates that its market share is a whopping 51.8%, compared to MSFT's 13.3%. Alphabet's (NASDAQ: GOOG , NASDAQ: GOOGL ) Google Cloud has a mere 3.3%. Other mega tech operators, like Oracle (NYSE: ORCL ) and IBM (NYSE: IBM ) are investing heavily in their cloud offerings as well.
The growing competition is natural as the cloud represents a secular shift. Note that Gartner forecasts that the market will go from $175.8 billion in 2018 to $277.3 billion by 2021. In other words, there is more than enough room for multiple players.
AMZN also has continued to push innovation with AWS. To this end, the company has built more sophisticated databases as well as AI systems and virtual private servers. What's more, AMZN has been aggressive with partnerships, which has created a powerful ecosystem. Consider that a few years ago it entered a deal with VMW.
For the most part, it seems highly unlikely that AWS will lose its edge anytime soon.
Bottom Line on Microsoft Stock
The latest quarter from MSFT highlights the continued progress with the cloud efforts. Revenues from the Intelligent Cloud segment jumped by 20% to $9.4 billion, driven by server products and Azure (which grew by 76%). MSFT has also benefited from the retooling of its Office Suite as well as acquisitions of companies like LinkedIn and Github. On the earnings call, CFO Amy Hood said that the company was winning more long-term cloud deals .
True, Microsoft stock is a bit pricey, with the forward price-to-earnings multiple 22X. But a premium is well deserved, especially in light of the company's strength in the fast-growing cloud market. And the potential deal with VMW points to how MSFT is continuing to make the right moves.
Tom Taulli is the author of High-Profit IPO Strategies , All About Commodities and All About Short Selling . Follow him on Twitter at @ttaulli . As of this writing, he did not hold a position in any of the aforementioned securities.
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