With the new embedded software, VMware's hypervisor can become the solid industry standard. Until now, virtualization was added after the server was built. But this embedded hypervisor takes that extra step away, making it easier for tech managers to virtualize their severs.
VMware Building 'Virtual' Lead Before Microsoft Gets Untracked
October 03, 2007: 08:05 PM EST
Oct. 3, 2007 (Investor's Business Daily delivered by Newstex) --
Hot IPO VMware has only gotten stronger, thanks to its latest product, as it awaits the arrival of its first major challenger -- a company called Microsoft. (NASDAQ:MSFT)
Since its initial public offering at $29 a share on Aug. 14, the software company's stock has jumped to near 92. It has surpassed Adobe Systems (NASDAQ:ADBE) ADBE, which went public in 1986, on market capitalization and ranks as the No. 4 applications software company, after Microsoft (MSFT), Oracle (ORCL) and SAP (SAP).
VMware (VMW) is by far the leading maker of virtualization software. This product makes servers more efficient, and is becoming a must-have item for big companies. At the company's annual conference in San Francisco last month, almost 11,000 people showed up, a jump of 50% from 2006.
"This company is growing like crazy," said Clay Ryder, an analyst with the Sageza Group.
Some analysts have a 100 or more price target on the stock. One reason is that VMware, which already dominates its field, last month paved the way for even faster growth. It announced that it now will embed its core product on servers before they ship to customers. Major server makers have said they plan to make hardware with VMware software pre-installed.
This adds up to a big challenge for Microsoft, which has low-end virtualization software out there but won't launch a product to challenge VMware's high-end core product until next year.
"VMware company has great potential," said Shebly Seyrafi, an analyst with Caris & Co., who last month raised his price target from 60 to 90.
But the stock's huge initial run-up has some analysts cautious.
Of seven analysts announcing in September that they had picked up coverage of VMware, three had neutral or equivalent ratings, according to Briefing.com. One analyst who already was covering the company, Walter Pritchard of Cowen & Co., said in a note Sept. 17 that the stock's fair value was in the 50s.
One Of The Latest Buzzwords
Yet, VMware has single-handedly made the term "virtualization" a buzzword among tech managers. The software creates multiple "virtual" servers within one actual physical server, and it works with the mainstream servers powered by chips from Intel (NASDAQ:INTC) INTC and Advanced Micro Devices (NYSE:AMD) AMD. Before VMware, virtualization has been confined mostly to very high-end computers.
These virtual servers are in essence huge computer files that include the operating system and software applications. The product that enables this, the main part of virtualization, is software called the hypervisor.
Using virtualization, companies can buy fewer servers, which in turn lowers maintenance and other support costs. Most physical servers use only a fraction of their potential computing power. Virtualization uses that untapped portion.
John Difucci, an analyst with Bear Stearns (NYSE:BSC) , says virtualization software sales will soar to $8 billion in 2011 from $800 million last year.
Analysts give VMware an 80% to 90% market share. Besides Microsoft, the two other companies most active in this field are XenSource -- which Citrix Systems (NASDAQ:CTXS) CTXS recently said it would buy -- and Virtual Iron, which uses open-source code. The two privately held companies remain small.
"I need high-powered binoculars to see the No. 2 player in the market," said Brent Thill, an analyst with Citigroup (NYSE:C) , which has a banking relationship with VMware.
VMware also sells other software tools to help tech managers, among other things, easily back-up virtual machines, or move them from one physical server to another.
With the new embedded software, VMware's hypervisor can become the solid industry standard. Until now, virtualization was added after the server was built. But this embedded hypervisor takes that extra step away, making it easier for tech managers to virtualize their severs. Dell (NASDAQ:DELL) DELL, Hewlett-Packard (NYSE:HPQ) HPQ and IBM (NYSE:IBM) IBM have said they plan to use VMware's embedded virtualization in their products.
"If you know how to turn on hardware, you know how to turn on virtualization," Raghu Raghuram, vice president of products and solutions for VMware. "Now, customers of all levels and sizes ... can do virtualization."
The new embedded software also is smaller than earlier versions. It has less code. That improves security by giving hackers fewer places to try to attack.
Small Is Huge
The smaller size might not sound like much, but "it's huge," said Citigroup's Thill, who says that was a key to Microsoft's software products. "Look at why Microsoft is so successful ... they won over the hardware providers."
As for Microsoft, it aims to unveil its first major-league hypervisor in late 2008.
By releasing an embedded hypervisor, VMware becomes a tougher rival for Microsoft, says Tom Bittman, an analyst with research firm Gartner.
At the same time, he says Microsoft's entry will help the virtualization market grow. The product has penetrated only 6% of its market, Bittman says.
"This is a huge market opportunity," he said. "You want to be fighting Microsoft on equal footing."
The new embedded product also could increase sales of VMware's management tools, Bittman says. He says 80% of the customers who use the hypervisor also use the company's management tools.
Those tools are key to the company's longer-term growth.
Bittman says VMware, with its management tools and virtualization software, can challenge Microsoft with products that act sort of as an operating system. That could make Microsoft's traditional operating system and related software unnecessary.
"I'd call VMware a bigger threat to Microsoft than Google GOOG," Bittman said.
Microsoft, though, sees no big threat from the embedded version by VMware, says Patrick O'Rourke, a group manager for Microsoft's Windows operating system unit. He says Microsoft's hypervisor will be even smaller than VMware's. The company plans to launch Windows Server 2008, its next big server operating system, early next year, and then release a version of that with its high-end hypervisor later in 2008.
"Customers have a broad choice of ... hardware platforms, almost all of which will support Windows Server 2008, which comes with the Windows hypervisor," O'Rourke said in an e-mail.
He says Microsoft's hypervisor will encourage more companies to use virtualization. "Working alongside industry partners, Microsoft's high-volume, low-priced business model will enable widespread adoption of virtualization," he said.
Analysts venture few predictions, but few doubt Microsoft's resolve.
Raghuram says his company is striving to stay ahead of Microsoft.
"We're putting 20 cents of every dollar we earn into R&D," he said.
Newstex ID: IBD-0001-20016168
Originally published in the October 3, 2007 version of Investor's Business Daily.
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