VMware: Can new products offset slowing virtualization growth?

Wells Fargo analyst Jason Maynard raises some key questions about VMware's growth down the road.

VMware is doing well, but the company could struggle because its new product lines won't be able to offset slowing growth in its core business, according to an analyst.

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Wells Fargo analyst Jason Maynard downgraded shares of VMware and said he favored Citrix and Red Hat. Maynard's big worry:

VMware has an outstanding legacy virtualization franchise and market share but is increasingly reliant on new product areas to maintain their growth and margin profile. The key point in our downgrade is that sooner or later we think growth in the core business slows and the new product areas won’t grow fast enough to make up the difference.

According to Wall Street's current projections, VMware is expected to deliver mid-teens growth in fiscal 2015. VMware has done a nice job diversifying its product line with the acquisition of AirWatch, but it's unclear how its core business will fare. VMware is capitalizing on the hybrid cloud concept, but it's a crowded bandwagon.

Among the key points in Maynard's research note:

  • VMware's vSphere is about 55 percent to 65 percent of the company's total bookings. VMware's end-user computing and management tools are growing faster

  • Virtualization is now prevalent and used in about 70 percent of servers and data centers, but transactional databases and business applications will be slower to move

  • VMware's vCloud Suite and end user products will need to grow faster. Both of those product lines have intense competition. "Most industry analysts agree that Microsoft has essentially closed the functionality gap with vSphere. On the end user computing side, we think that the company’s acquisition of AirWatch positions them well, but we believe Citrix, MobileIron, and Microsoft will not be standing still," Maynard said.

  • New concepts such as virtual storage and networking are promising for VMware, but too immature to move the revenue needle.

Add it up and VMware sees a $50 billion total addressable market in 2016 led by hybrid cloud, end user computing (EUC) and software defined data centers (SDDC). The big question is whether VMware can leverage its installed base to take big chunks of that pie.

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