VMWare is dead, which affects EMC somewhat
January 28, 2009
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RELATED TICKERS: VMW
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OK, I am exaggerating somewhat. VMWare is still very much alive. However, the economic crisis came at precisely the wrong moment for the company. Had it been in its present position in 2004, it would have taken off, captured significant market share and built a lasting advantage over competitors. However, companies are scaling back their tech spending on all fronts.
Additionally, VMWare's competitors are catching up. The company's lead in virtual server technology is not unassailable. While VMW is ahead, three competitors currently have free technologies out and are catching up to VMW's products. Microsoft in particular, despite its overall absence of corporate focus, has a huge budget (as well as the fact that it is, or should think of itself as, a software company).
VMW's stated intent to expand into virtual data centers as the next phase of growth seem to me to be an implicit admission that its competitors will catch up. However, I question whether they can establish any sort of advantage in this field. Indeed, Citrix already has virtual desktop products in this area.
The bottom line is that I do not see VMW being able to stake out a moat. The increased competition in its core fields will mean that it basically becomes a commodity producer.
Now, EMC. Storage spending doesn't seem to be declining as fast as everything else. A recent TMF article (Do the Safety Dance with EMC) says that it's "a deep-discount value stock that derives much of its actual value from a high-growth subsidiary." I agree that EMC is a value buy at this point, even if VMW's prospects are diminished.
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