While politicians loudly decry the “monopoly” of Cloud Czars like Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT), the market is quietly undermining their power. That’s because cloud computing is no longer a big deal. Anybody can have a cloud. And as the cost of building and maintaining clouds continues to decline, VMware (NYSE:VMW) is out to make some serious coin, making VMware stock an appealing name to keep on your list of stocks to watch.
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It’s not that big clouds won’t still exist. They will. VMware’s most important alliance may be with Amazon Web Services. It manages interactions between corporate clouds and the wider internet, using Amazon’s vast data stores. But the public clouds are doomed to be utilities. Enterprises are taking back control over their cloud future.
Why So Cheap?
As trade opened Sept. 10, VMware had a market cap of $59 billion on trailing year revenue of $9.5 billion, and a price-to-earnings ratio of under 10. That’s dirt cheap for a tech stock, even without a dividend.
VMware is cheap in part because of its complex relationship with Dell Technologies (NASDAQ:DELL). Dell bought EMC’s 80% stake in VMware back in 2015, when it was privately held, then used the tracking stock to go public last year.
The result is that DELL has the debt from its original 2015 transaction. That’s now $45 billion. The VMware balance sheet remains relatively pristine — just $4.2 billion of debt and $3 billion in cash as of the end of July.
The clean balance sheet let VMware launch an acquisition binge with the new year. It has already made four deals since January and is in the process of completing two more, for Pivotal Software (NASDAQ:PVTL) and Carbon Black (NASDAQ:CBLK).
A Complete Cloud Stack
The result will be a complete stack of cloud tools with which customers can load existing applications into Kubernetes containers, run them under VMware’s vSphere virtualization system and protect them.
VMware calls it “Project Pacific.” It’s designed to go up against International Business Machine’s (NYSE:IBM) OpenShift, running both cloud-ready and cloud-native apps. It also competes with Google’s Anthos, which runs on vSphere, through a program called Tanzu Mission Control, automating policy and security management. Load management is handled through another recent acquisition, Avi Networks.
It sounds complex, but it points to a world where companies reconfigure their own systems as clouds, moving workloads in-and-out of multiple public clouds as needed. Dell sells the hardware for building these new private clouds, while VMware handles the management and integration issues.
This is the market that’s the new “hockey stick” of computing, an area where analysts are predicting spectacular growth. Gartner expects cloud spending to double within three years, to over $330 billion. For now there’s plenty of room for all players to grow, witness how Google Cloud is growing rapidly without picking up market share.
The Bottom Line on VMware Stock
Many analysts expected the hybrid cloud market to follow the public cloud market quickly. But the economics of public clouds were so great that many companies delayed their own private cloud plans, waiting for better tools.
Those tools are now being offered. Enterprises of all types can now manage and secure their own clouds, using public clouds only on an as-needed basis. That means data can be maintained within the company or, as cloud data is increasingly regulated, within a country.
The clouds have created a new global computing environment, but the rest of enterprise computing is adapting to it. As it does, the dominance of the public clouds is going to be challenged, as enterprises gain independence from them.
This will happen with help from companies like VMware. It may be the biggest opportunity in computing today. And that makes VMW stock one to own for the long term.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT and AMZN.
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