VMware Upgraded On More Virtualization Growth

More software virtualization growth looks like a reality for VMware (NYSE:VMW), says Srini Nandury, an analyst for Summit Research.

In a research report Thursday, Nandury, who took over coverage of VMware from colleague Richard Williams, upgraded his rating on VMware stock to buy from hold, citing the opportunity for continued growth in the server virtualization market.

VMware is the No. 1 provider of virtualization software, which lets a single server run multiple operating systems and applications, increasing flexibility and reducing operating costs by, among other things, reducing the number of servers needed.

As VMware moves into other areas such as Software-Defined Networking, where it competes with rivals including Cisco Systems (NASDAQ:CSCO), server virtualization remains a key growth driver for the company, Nandury says. He has a price target of 105 on VMware stock, which was down a fraction in morning trading in the stock market today, near 85. VMware stock has languished in the past year and is down 18% in that span.

"We believe server virtualization could still be the driver for growth given that only 30% to 40% of CPUs (central processing units) have been virtualized (but 85% of workloads have been virtualized)," he wrote. "This means that many mission-critical applications are still being deployed on bare metal servers vs. virtualized ones. These mission-critical applications will likely be virtualized given the maturity of the VMware solution (i.e. hypervisor and management tools) providing continued opportunity for the company.

"Given that VMware pricing is based on per CPU basis, we believe there is large headroom to grow revenue for (the) next few years as more and barer metal servers get virtualized."VMware is slated to report Q1 earnings on Tuesday after the market close.

The company's challenges include an emerging technology called Docker Container software.
"Currently, Docker Containers are yet a threat given that the management eco-system is still in development today," Nandury wrote. "Given continued VC investments, the focus from open-source community and the partner eco-system, we believe robust management tools will develop over time impacting VMware market share/revenue."

Also Thursday, investment bank Monness Crespi Hardt hiked its price target on VMware stock to 112 from 102, according to Analyst Ratings Network.