EMC (NYSE:EMC) is the global leader in the external disk storage market and parent firm of the virtualization software vendor and market leader VMware (NYSE:VMW). EMC’s stake in VMware has decreased from 100% in 2005 to 80% in 2010.
We currently have a $35.11 price estimate for EMC’s stock, implying 35% upside to market price. We estimate that VMware is the second most valuable business division for EMC, after information storage, making up nearly 40% of the firm’s equity value by our estimates. Since we estimate a $72.6 billion equity value for EMC, our analysis puts VMware’s equity value at $29 billion. Notably, our estimated equity value for VMware is close to 15% below the company’s current market cap of nearly $34 billion.
Below we discuss the outlook for VMware’s virtualization software offerings and the firm’s share in the global virtualization software market.
VMware’s Share in the Virtualization Software Market
VMware offers virtualization software that can be categorized into two primary segments:
1. Desktop Virtualization Software
Desktop virtualization software allows users to run multiple operating systems on a single desktop or notebook. For example, by using VMware’s desktop virtualization software, a user can run Apple’s Mac OS X from within a Microsoft Windows machine.
2. Server Virtualization Software
Server virtualization software allows companies to increase the utilization of their servers by allocating the virtualized resources of server hardware to multiple applications, in a manner that is independent of the underlying operating system required to execute the application.
VMware’s share in the virtualization software market has decreased from 50% in 2005 to 45% in 2010 as the firm has lost share to competitors like Microsoft, Citrix and Oracle that have aggressively targeted the virtualization software market.
We project that VMware’s virtualization software market share will continue to decline in the future, reaching 34% by the end of our forecast period, driven by the following factors:
1. Increasing Competition
Firms like Microsoft, Citrix and Oracle have become active in the virtualization market over the past few years and have taken share from VMware, which once comfortably dominated the market.
As the market is forecasted to grow at a rapid pace going forward,  competition should increase, making it difficult for VMware to maintain such a high market share.
2. Premium Pricing of VMware’s Software
VMware’s virtualization software package is the most expensive and some of its competitors offer similar software at a fraction of the price, while open source products are usually free. As enterprises remain cost conscious after the economic recession of 2008-09, they might opt for lower priced products rather than VMware’s premium offerings.
However, VMware has its own selling points, the most important being superior features. For e.g., VMware offers live migration which others do not offer. Live migration provides the ability to move operating systems and applications from one server to another while they are running.Notes: