Craig-Hallum’s Rajesh Ghai today reiterates a Hold rating on shares of VMWare (VMW), and a $94 price target, while cutting estimates for this year, based on a concern about a “significant potential slowdown in fiscal 2013 license revenue sales” at the hands of both Microsoft‘s (MSFT) “HyperV” virtualization technology as well as the open-source “OpenStacks” technology.
Shares of VMWare today are up 32 cents at $95.57.
Ghai cut his estimate for this year to $5.39 billion in revenue and $3.20 per share in profit from a prior $5.41 billion and $3.22. That is below the Street consensus of $5.43�billion�and $3.24 per share.
VMWare already has to contend saturation of its virtualization market, Ghai thinks:
We are concerned that with 60-70% of datacenter workloads likely to be virtualized by year-end, the core virtualization market (legacy vSphere) may begin to slow down in FY13. We believe about 85% of enterprise workloads are potential targets for server virtualization. We believe about 15% of workloads are unlikely to be virtualized considering they are workloads that need bare-metal performance and are unlikely to be amenable to allowing another layer of software (hypervisor, etc.) to come between the application code and the CPU. According to VMW, about 60- 70% of x86 server workloads are likely to be virtualized by year-end. This, in our opinion, suggests that the greenfield opportunity for VMW is fast declining.
HyperV is good enough for a lot of tasks, threatening to displace VMWare’s offering, thinks Ghai:
Our checks indicate it is good enough for 90% of Enterprise workloads. We expect this credible and cheaper alternative to exert incremental pricing pressure on core vSphere licenses in the future. While CIO’s have justified paying higher prices for VMW in the past given the savings offset from server consolidation and power savings, we believe with the low hanging fruit being plucked, Enterprises are more reluctant to pay the incremental premium.
Worse, OpenStack is a new kind of threat to VMWare that will be harder to hold off, he thinks:
While we have heard of competitive threats emerging to VMW�s server virtualization leadership in the past � from Microsoft in particular and to some extent from Citrix � and have seen those threats dissipate over time especially as VMW continued to out-invest and out-execute all its competitors to maintain a significant feature-function lead, we are not sure that the threat posed to VMW by OpenStack will go the same way as other threats have in the past [�] Enterprise and Service Provider customers in particular are looking for cheaper alternatives to VMW and are more desperate now to avoid vendor lock-in with VMW, considering they see an increasing footprint of their infrastructure deployments running on VMW.. OpenStack is by design a more open solution, unlike VMW�s Cloud Automation and Orchestration vCloud suite which runs only with VMware�s vSphere. Cloud Service Providers in particular and increasingly Enterprise customers want more open solutions that can work with a diverse set of products from multiple vendors [�] OpenStack is being developed with code and financial support from a wide variety of industry participants that could end up supporting its use in preference to VMW. Platinum members of the consortium driving the development include Public Cloud providers such as Rackspace, AT&T and HP (EDS) and system vendors such as IBM, HP and Red Hat. Gold members include Cisco, Dell, NEC, Intel, NetApp and Yahoo. We note that VMW also joined the consortium recently as a Gold member after its acquisition of Nicira. We find VMW�s decision to join the consortium interesting given it enables the company to keep tabs on its most imminent threat, although officially it appears the decision was prompted by the fact that Nicira was the lead contributor of code to OpenStack�s networking project Quantum.
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