VMware Poised To Capitalize On Shift Towards Hybrid Clouds

VMW: VMware logo

VMware (NYSE:VMW), the global leader in virtualization and cloud computing announced its vCloud Hybrid Services in the previous quarter. [1] The hybrid cloud market is at a nascent stage right now, but is likely to be widely adopted in the enterprise in the coming years. According to a Gartner report, nearly half the large organizations will have hybrid cloud deployments by 2017. [2] Hybrid cloud is the new technology that uses features of both public and private clouds. Sensitive data is retained on the private cloud whereas the shared data is available on a public platform.

While there were concerns with security issues with the hybrid model. However, security solutions exist that prevent external users from accessing private data, which will foster deployment of hybrid cloud solutions.   [3] Below we take a look at the global cloud market and how VMware’s efforts to offer hybrid cloud services may drive its revenues in the upcoming quarters. We have a $93.64 price estimate for VMware which is 5% higher than the market price.

See our complete analysis for VMware stock here

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Global Cloud Market

Gartner forecast earlier this year that the public cloud would grow 19% to a $133 billion market in 2013 from $112 billion last year. Additionally, they expect the net expenditure on cloud services to be around $677 billion by 2016. [4] Where the public cloud platform is growing at massive scale, VMware provides enterprise cloud computing, which is basically different from public cloud because of additional security in private clouds. This growth rate could be slightly misleading for investors in private cloud providers such as VMware since the private cloud is a relatively smaller market.

It is clear that there is an expectation of strong demand for all types of cloud services offerings ranging from cloud advertising, application hosting or software as a service (SaaS), infrastructure as a service (IaaS), cloud management and security services, and application infrastructure or platform as a service (PaaS). Cloud advertising is the largest segment among all cloud offerings with about half the money spent on cloud services going to cloud advertising. Gartner forecasts almost $310 billion to be spent on cloud advertising out of a total $677 billion to be invested by 2016. Major players in this segment include Amazon Web Services, Rackspace, Verizon, Microsoft Azure and Citrix. Recently Google announced the general availability of Google Cloud Engine to enter into this segment to target enterprises along with small and medium businesses (SMBs).  ((Amazon Is The Cloud To Beat Google Is The Cloud To Watch, GigaOM, April 2013))

Private Cloud vs Hybrid Cloud

Private cloud infrastructure is developed and operated for use by a single organization but can be hosted internally with the hardware and software products of companies such as VMware, Citrix, Microsoft, IBM and Dell.  Purely private clouds are preferred by customers which use applications hosted on an internal cloud when security is a major concern, including certain industries that have strict security regulations (finance, pharmaceutical development, healthcare). For example, the healthcare industry adopting cloud computing is likely to make use of private clouds owing to Health Insurance Portability and Accountability Act (HIPAA) regulations. (Read our article VMware To Gain From Healthcare Industry Adopting Cloud)

In other cases where companies communicate with and offer services to clients, a hybrid cloud is a better solution. Using a hybrid cloud, companies can host sensitive data internally while they host other data or applications on a public platform. This allows an ease of access by their clients and third-parties. This makes the cloud computing relatively less expensive and less cumbersome for access. Another feature of hybrid clouds is the use of cloud bursting, a feature which allows organizations to switch to public cloud when the workload is high. For instance telecom companies and retail chains have high workloads on holidays. It makes it very difficult for their private cloud to handle the workload. Using hybrid cloud, the additional workload can be spilled over or “burst into” the public cloud. Since all delivery models (PaaS, Saas, IaaS) are available on-demand, the scaling up can be taken care of without the need of building an expensive infrastructure. Even though companies such as Amazon are hesitant to fully adopt hybrid cloud, owing to lower margins, they have made the option available. ((Amazon Web Services Grudgingly Accepts Hybrid Cloud, IT World, November 2013)) ResarchAndMarkets report suggests that the hybrid cloud will grow at a CAGR of 30% from 2013 through 2018 to become an $80 billion market. [5]

VMware’s vCloud Hybrid Service

VMware initially declined to offer public cloud services, until it announced the general availability of vCloud Hybrid service in the last quarter, after having launched the product for limited release earlier this year. [6] vCloud Hybrid service uses VMware’s vSphere technology as a framework. The vSphere was conceived as an operating system to utilize VMware’s hypervisor, the ESX, which is an enterprise-level computer virtualization product for cloud computing. With the hybrid cloud market expected to grow significantly over the next few years, VMware seems poised to capture the market considering it already has a huge enterprise customer using its virtualization products.

With VMware offering hybrid cloud service at a stage where it is expected to grow at an annual 30% rate. VMware’s major competitors in this upcoming segment include Amazon and Rackspace. Amazon also announced the option of hybrid cloud along with its private cloud, but is still skeptical about the hybrid solution. Additionally, Rackspace also launched its Performance Cloud in the hybrid market. [7] These announcements were made after VMware launched vCloud Hybrid implying that VMware already has first movers advantage. VMware could gain  market share in hybrid cloud computing in the long run, but it is difficult to asses how hybrid cloud adoption will immediately affect the our price estimate for VMware.

Understand How a Company’s Products Impact its Stock Price at Trefis

  1. VMware News Release, VMware, August 2013 []
  2. Hybrid Cloud To Comprise Half Of Enterprise Market, ChannelWeb, October 2013 []
  3. Does Hybrid Cloud Mean Fragmented Security, ChannelWeb, September 2013 []
  4. Worldwide Public Cloud Services Market, Gartner Newsroom, Feb 2013 []
  5. Research And Markets: Global Hybrid Cloud Market Report, Reuters, October 2013 []
  6. VMware Press Release, VMware Investor Relations, Aug 2013 []
  7. Rackspace Enhances Hybrid Cloud With New Performance Hybrid Cloud, Yahoo Finance, November 2013 []