VMware Is a Moaty Virtualization Stalwart Set To Be Acquired by Wide-Moat Broadcom

Analyst

William Kerwin

VMware, a pioneer of virtual machines, dominates the mature data center server virtualization market. With organizations prioritizing hybrid and multicloud approaches, we believe VMware’s robust cloud provider partnerships, including the major hyperscalers, should help the firm handle customer needs. We expect VMware's growth to come from being the glue between computing infrastructures, networking locations, and burgeoning security and developer offerings being bolstered from its strong end user compute portfolio. 

Our view of cloud networking, akin to VMware's assessment, is that most enterprises will utilize hybrid cloud solutions. Public clouds can precipitously augment network growth but enterprises face integration complexities among on-premises networks and private and public clouds. Beyond hyperscale cloud provider partnerships, VMware's Cloud Provider Program offers thousands of cloud partners collaborating with VMware software. In our view, this allows VMware to remain ingrained in networks while becoming the commonality between private and public clouds. 

VMware's vSphere and ESXi hypervisor are virtualization gold standards, and its hybrid cloud platform creates a consolidated view across multicloud environments. We believe the company’s strong franchises within end user compute, security, and virtualized networking and storage can support newer growth ventures such as VMware’s integration of Kubernetes-based container management within vSphere. We think software cohesion across on-premises and clouds along with nascent networking products should give VMware maintainable growth. 

We like VMware’s pending acquisition by wide-moat Broadcom, for both firms. We believe it’s a value-accretive deal for Broadcom and that VMware has benefited from Broadcom’s stock price run-up, effectively enriching the deal for VMware shareholders. We also expect VMware’s profitability to soar under Broadcom’s expense-slashing approach, especially as it focuses more on upselling within existing large customers and less on new customer acquisition.

Business Strategy & Outlook

We designate VMware as having a narrow moat originating from customer switching costs. As the dominant player in server virtualization, VMware has an extensive installed base in mission-critical enterprise data center servers. The company's core server virtualization business helped carve out its moat and remains crucial to VMware. However, its virtualization ecosystem has proliferated beyond server compute into areas such as storage and networking, and VMware has diversified its revenue streams with solutions for cybersecurity, application modernization, and unified digital workspaces. We consider these newer ventures within VMware to be important ones that still benefit from an economic moat, in terms of high customer switching costs. In our view, customers are likely to stay with VMware because of knowledge of its product ecosystem, its solutions being a unified layer for hybrid cloud ecosystems, as well as the risks and complexities associated with changing solutions that are fundamental to operations. 

The company revolutionized the enterprise data center market in 2001 with its first virtual machine offering for servers. Enterprises utilizing virtual machines through a hypervisor, such as the industry gold standard ESXi by VMware (part of vSphere), enjoy higher server utilization rates due to the software's ability to segment the hardware into multiple instances of itself. Information technology professionals found value in the hypervisor's ability to more efficiently utilize server compute resources and lower the quantity of costly physical hardware required to accomplish data server services. The virtualization pioneer essentially commands the entire market for paid virtualization infrastructure software. Nonetheless, the server virtualization market can be considered saturated, and we expect VMware's market share to remain stable in server virtualization. 

VMware's software being installed throughout enterprise server racks creates a barrier to changing vendors, in our view. The firm created a widespread virtual machine and hypervisor market and then flourished with its first-mover advantage. We believe IT teams are reticent to change vendors because of VMware's superiority in feature suites, product acumen and support, and potential network disruption. Moving to a VMware alternative such as opensource options can require significant overhauling of an enterprise's network backbone. IT professionals have spent considerable time becoming fluent and accustomed to VMware's product offerings. Entrenched VMware product knowledge creates a tendency for professionals to evolve with VMware offerings instead of uprooting the incumbent solution. In our view, VMware's customer support and services provide it with an advantage over competing open-source options. We also believe that VMware's user-friendly product design created a wider customer audience versus technically challenging open-source software that are usually less feature-rich. 

While VMware's dominance in a core part of the IT stack helped establish its narrow moat, we believe VMware's customer stickiness is reinforced through its ecosystem of virtualization products, including virtual storage and networking, as well as adjacent solutions for cybersecurity and end user compute. Enterprises can virtualize storage with vSAN or the networking layer with NSX, manage cloud instances with vRealize, or join the rapid adoption of SD-WAN and hyperconverged infrastructure. VMware has a robust cybersecurity portfolio as part of NSX and its acquisition of endpoint protection firm Carbon Black. Regarding end user computer and digital workspace, VMware's Workspace ONE is considered a best-in-class unified endpoint management solution for device and application monitoring and VMware Horizon provides organizations with virtual desktop infrastructure. In our view, potential disruptions to displace VMware within and across networks are not worth the risk to enterprises. VMware's largest advantage, in our opinion, could be its ability to offer one interface for a company's various networking and IT infrastructure requirements, from on-premises to public and private clouds to the edge. 

VMware's cloud product offerings are intended for private, public, or hybrid clouds. Although public cloud providers remain a threat to on-premises enterprise server usage, VMware's expanding product arsenal is an attempt to capitalize on market shifts. To replace on-premises software licenses, VMware is rolling out more software-as-a-service, or SaaS, offerings. VMware's Cloud Provider Partners, or VCPP, and related SaaS is a quickly growing business that provides enterprises with VMware software solutions paired with a wide swath of cloud vendors and their services. Focusing on these areas is required as organizations decrease on-premises networking, storage, and compute expenditures. In our view, many enterprises could benefit from retaining VMware product fluency in their ecosystems. As companies embrace cloud virtualization beyond servers, using unfamiliar software packages could create damaging network speed bumps. VMware's partnerships with the largest cloud service providers, including a preferred partnership with Amazon's AWS, should keep VMware's products relevant to enterprises implementing hybrid and public clouds. 

In our view, VMware's efforts in the hybrid cloud market could be its most fruitful cloud endeavor. Infrastructure differences between enterprise private clouds and public clouds can cause project delays and unexpected costs for IT departments. VMware's advantage is its ability to provide continuity between on-premises hardware, private cloud, and public cloud offerings, in our view. Many companies have struggled with migrating to public clouds but want to reap the benefits of outsourcing workloads. Conflicting private and public cloud software systems and the desire to keep certain items in private clouds, on-premises, or the edge for speed, security, cost, and geographical/legal concerns have been problematic to many enterprises attempting to fully adopt public clouds. Most IT professionals are accustomed to using VMware on-premises or in their private clouds but were not afforded the same familiar interface within public clouds. VMware's hybrid cloud efforts, through partnerships with cloud providers, gives IT teams a sense of familiarity between private and public clouds. We believe enterprises will continue to pay for VMware software while expanding operations to public clouds due to commonality between existing VMware product entrenchment and new offerings. 

Network virtualization from VMware allows an enterprise's hybrid cloud to virtualize an entire network from switches to internal firewalls to routing. Enterprise networks become more complicated as firms move further away from servers and proliferate access points and devices on their networks. VMware's interoperability with industry hardware leaders and its ability to offer a unified hybrid cloud view should keep it as a viable option for enterprises moving to cloud solutions. 

Containers, which split up instances of the operating system instead of dissecting the hardware, are becoming popular alternatives to virtual machines. Compared with containers, virtual machines are considered resource-hungry and slower but offer superior security and manageability. We believe that enterprises developing applications and migrating resources to the cloud will utilize a mixture of the two technologies. VMware acquired container orchestration and management assets, and has melded those technologies into a holistic view for developer and operation teams. We believe VMware was quick to see the disruptive nature of this technology and that the embracement of containerization was necessary for the firm. Containers will take some market share away from virtualized machines, but we also expect some harmony between the two technologies and VMware's integration of container management into vSphere to be alluring to developer and infrastructure teams.

VMware is well entrenched in one of the most mission-critical pieces of IT operations, and we believe its burgeoning product offerings will be on customers' short list of potential vendors during network upgrades. To protect its moat as technology evolves, VMware is expanding from its dominant position in machine virtualization and into adjacent markets of hybrid clouds, digital workspace management, containers, and security. We assess that VMware will not command such dominant market share in those markets as it enjoys in server machine virtualization; however, the company's strategic plan is sensible for continued growth.

Narrow

Economic Moat

VMware

VMware, Inc. engages in the provision of cloud infrastructure and business mobility. Its products include Software-Defined Data Center, Hybrid Cloud Computing, and End-User Computing. It supports modernizing data centers, integrating public clouds, empowering digital workspaces and transforming security. The company was founded by Diane Greene, Mendel Rosenblum, Scott Devine, Edward Wang and Edouard Bugnion in 1998 and is headquartered in Palo Alto, CA.

Revenue

Cost of revenue

Gross profit

Operating expenses

SG&A

Other

Operating income

EBITDA

Net income

Earnings per share

Total assets

Current assets

Cash & equivalents

Receivables

Inventory

Non-current assets

Net PPE

Intangibles

Total liabilities

Current liabilities

Short term debt

Income tax payable

Non-current liabilities

Long-term debt

Total equity

Stockholders equity

Minority interest

Total liabilities & equity

Total debt

Net debt

Book value per share

Cash from operations

Funds from operations

Change in working capital

Cash from investing

Capital expenditure

Purchase/sale of investments

Purchase/sale of business

Other sources

Cash from financing

Change in stock

Change in debt

Cash dividends paid

Cash from other sources

Net change in cash

Free cash flow

Broadcom

Broadcom Corporation (NASDAQ:AVGO) merger with VMWare and its outlook for generative artificial intelligence (AI) are likely to take centre stage when the chipmaker reports fourth-quarter results after the closing bell on Thursday, rather than the numbers themselves. The chipmaker has already guided for 4Q revenue of about $9.27 billion, slightly less than the $9.28 billion consensus estimate, due to sluggish demand for its semiconductors.

Broadcom's merger with VMware likely to overshadow 4Q earnings

ANN ARBOR, Mich.--(BUSINESS WIRE)--VergeIO, the leading VMware alternative, announced the immediate availability of VergeOS Small Data Center (SDC) Edition. The VergeOS SDC edition is more than a competitive swap out of VMware Essentials. It is a significant capability upgrade while lowering costs. Ironically, VMware Essentials is missing the essential capabilities that small data centers need most. With VergeOS SDC, customers get everything included in VMware Essentials plus advanced storage s.

VergeIO Unveils VMware Essentials Upgrade Program

Broadcom Inc's recently closed acquisition of virtualization software firm VMWare offers mid-to-high-single digit percent earnings per share (EPS) accretion, according to BofA Securities analysts.   In an update to clients, the analysts raised their price objective on Broadcom stock to $1200 per share from $1050, while reiterating a 'Buy' rating, noting that VMWare can help Broadcom reduce business cyclicality and expand product offerings to key enterprise customers.

Broadcom analysts up target price as VMWare deal closes; AI at forefront

Last week, Broadcom (NASDAQ: AVGO ) announced that it had successfully acquired VMware after receiving a final regulatory approval from China. Broadcom previously received regulatory approval from the U.S. and U.K. The process took well over a year, as the company first announced the $69 billion acquisition in May of 2022.

VMware Layoffs 2023: What to Know About the Latest Broadcom-VMware Job Cuts

NEW YORK--(BUSINESS WIRE)--Broadcom Inc., a global technology leader in semiconductor, data center hardware, and infrastructure software solutions, announced that it had closed its $69 billion acquisition of VMware, Inc., a leading virtualization software provider. As global lead antitrust counsel to VMware in what The Wall Street Journal has called “one of the largest technology mergers ever,” Axinn, Veltrop & Harkrider LLP helped VMware secure global regulatory clearances in more than 10.

Axinn Advises VMware in Securing Global Antitrust Clearance for $69 Billion Acquisition by Broadcom

Many VMware employees learned Monday their positions would be eliminated. Broadcom announced it closed its $69 billion acquisition of VMware on November 22.

Broadcom lays off many VMware employees after closing its $69 billion acquisition of the company

Broadcom stock is poised to move higher now that the chipmaker has completed its purchase of VMware, analysts say.

Broadcom's VMware Acquisition Removes Overhang On AVGO Stock

It's taken a year and a half, but Broadcom (AVGO) has finally acquired rival software firm VMware (VMW).

Broadcom Finally Closes Purchase of VMware After Chinese Regulators Approve

Broadcom Corporation (NASDAQ:AVGO) is set to finalize its $69 billion acquisition of cloud technology firm VMware, having overcome regulatory hurdles, it said Wednesday. The firm has received China's approval for the deal, which was seen as the last major condition to closing the megadeal.

Broadcom secures China's approval, clears final hurdle for $69B VMware acquisition

The unprecedented wait for Chinese approval appears to be worth it.

VMware Holders Will Get Windfall in Broadcom Tie-Up

Computer chip and software maker Broadcom has announced it has cleared all regulatory hurdles and plans to complete its $69 billion acquisition of cloud technology company VMware on Wednesday.

Broadcom planning to complete deal for $69 billion acquisition of VMWare after regulators give OK

Broadcom (NASDAQ: AVGO ) and VMware (NYSE: VMW ) stock are sliding on Tuesday as they come even closer to completing a merger deal. The big news that has AVGO and VMW stock on the move today is approval for the deal from Chinese regulators.

AVGO, VMW Stocks Slide as Broadcom-VMware Deal Nears

Broadcom Corporation (NASDAQ:AVGO) and VMWare have received a list of conditions from Chinese regulators pertaining to its $61 billion merger, marking the last hurdle for the megadeal. The Chinese state market regulator has outlined specific conditions that must be met for approval, with a focus on how the companies conduct business in the Chinese market.

Broadcom and VMWare navigate final hurdle as Chinese regulators set conditions for $61B megadeal

The merger is expected to be completed on Wednesday.

Broadcom-VMware Deal Gets China Approval. The Stocks Are Dropping.

Broadcom Inc. AVGO and VMware Inc. VMW expect to close their merger Wednesday after receiving all necessary regulatory approvals, the companies said Tuesday morning. The companies had been waiting on China to approve the $61 billion deal, which had been announced in May 2022.

Broadcom and VMware win final approval to close merger, but their stocks fall

SAN JOSE, Calif. & PALO ALTO, Calif.--(BUSINESS WIRE)--Broadcom Inc. (NASDAQ: AVGO) and VMware, Inc. (NYSE: VMW) today announced that they have received all required regulatory approvals and intend to close Broadcom's acquisition of VMware on November 22, 2023. Broadcom has received legal merger clearance in Australia, Brazil, Canada, China, the European Union, Israel, Japan, South Africa, South Korea, Taiwan, the United Kingdom, and foreign investment control clearance in all necessary jurisdi.

Broadcom and VMware Intend to Close Transaction on November 22, 2023

The situation for VMware shareholders is complex and almost unprecedented.

VMware Investors in Limbo as Broadcom Merger Awaits Chinese Approval

ANN ARBOR, Mich.--(BUSINESS WIRE)--Today, VergeIO, a top-tier VMware alternative, unveils its risk-free VMware conversion services. Powered by IOmigrate, VergeIO ensures a frictionless transition of VMware virtual machines to VergeOS with just a few clicks. In light of Broadcom's pending acquisition of VMware and growing user concerns about the state of the virtualization software and the company behind it – ranging from rising licensing costs, ransomware vulnerabilities, and diminishing qualit.

VergeIO Announces Free VMware Conversion

As Broadcom Inc. and VMware Inc. get closer to their new merger deadline of Nov. 26, some investors are nervous that the deal will not get done, with a $1.5 billion termination fee hanging over the chip maker.

Broadcom's deal to buy VMware may be in jeopardy, but its soaring stock will be just fine

PARIS & BARCELONA, Spain--(BUSINESS WIRE)--Orange Business and VMware, Inc. (NYSE: VMW) are strengthening their partnership to deliver Flexible SD-WAN with VMware as the first fully embedded SD-WAN offering in Evolution Platform. The Orange Business Evolution Platform combines a secured digital infrastructure with an agile, cloud approach to order and manage services. Cloud has become the benchmark for customer experience. Performance and trust are now non-negotiable, and innovation is the cata.

Orange Business and VMware Transform Flexible SD-WAN to Simplify Customer Experience With Digitalization and Automation

BARCELONA, Spain--(BUSINESS WIRE)-- #crosscloud--VMware Explore 2023 — Today, VMware, Inc. (NYSE: VMW) announced the next generation of VMware Data Services Manager, designed to support today's data-driven innovation by making data services as easy to consume as what VMware has achieved for virtualized compute, storage, and networking. VMware Data Services Manager will deliver best-in-class management for a wide range of data services, not just databases, as a natively integrated experience for VMware Cloud.

VMware Accelerates Data-Driven Innovation with New Advanced Data Services Capabilities for VMware Cloud Foundation

BARCELONA, Spain--(BUSINESS WIRE)-- #crosscloud--VMware Explore 2023 — VMware, Inc. (NYSE: VMW) today announced a collaboration with Intel to extend the companies' more than two decades of innovation to help customers accelerate the adoption of artificial intelligence (AI) and enable private AI everywhere – across data centers, public clouds, and edge environments. VMware and Intel are working to deliver a jointly validated AI stack that will enable customers to use their existing general-purpose VMware and.

VMware Collaborates with Intel to Unlock Private AI Everywhere

Alphabet

BARCELONA, Spain--(BUSINESS WIRE)-- #crosscloud--VMware Explore 2023 – Today, VMware, Inc. (NYSE: VMW) and Google Cloud (NASDAQ: GOOG) announced an expanded partnership to deliver Google Cloud's AlloyDB Omni database on VMware Cloud Foundation, starting with on-premises private clouds. The powerful combination of AlloyDB Omni, a PostgreSQL-compatible database that runs anywhere and offers built-in support for generative AI, and the highly performant, more secure, reliable VMware Cloud Foundation, will enable.

VMware and Google Cloud announce planned PostgreSQL-compatible Database Solution for traditional and generative AI applications on VMware Cloud Foundation

BARCELONA, Spain--(BUSINESS WIRE)-- #crosscloud--VMware Explore 2023 — VMware, Inc. (NYSE: VMW) today announced new innovations and technology partnerships that will help accelerate sovereign digital innovation and enhance security for customers around the world. Today, more than 50 VMware Sovereign Cloud providers in 33 countries are part of a powerful, interconnected, and diverse ecosystem that supports customers' sovereign cloud requirements. Together, VMware and VMware Sovereign Cloud partners are helpin.

VMware Unveils New Developer, Data, and Security Services for Sovereign Clouds

BARCELONA, Spain--(BUSINESS WIRE)-- #crosscloud--VMware Explore 2023—VMware, Inc. (NYSE: VMW) today announced new updates to Spring, the leading Java development framework, plus enhancements across VMware Tanzu Platforms, VMware Tanzu Data Services, and VMware Tanzu Intelligence Services that will help teams develop, operate, and optimize higher-performing applications more quickly, cost-effectively, and securely. Software development teams are at the forefront of business innovation, building modern applica.

News for VMware Stock (VMW)