Cloud Computing Helps VMWare Stock Reach for the Skies

VMWare is up in after-hours trading after strong earnings were reported on Monday, thanks to growth in the virtualization solutions sector and an increased integration of cloud computing solutions. Analyst averages of 60 cents earnings per share on revenue of $1.05 billion were short of the mark, with the company reporting Q4 2011 EPS of 62 cents per share on revenues of $1.06 billion. Earnings estimates from Estimize were closer to the mark, at 63 cents per share. The company's revenue for the year came close to the $4 billion mark for the first time. Shares jumped over 5% after the close of the bell on Monday as investors see great growth potential in VMWare.

VMWare is one of the many beneficiaries of Apple's (NASDAQ: AAPL) growing market share, as the demand for virtualization solutions increase as people move across OS platforms. Throughout the last decade the company saw demand for its VMWare products skyrocket such as VMWare Fusion, which allows Apple computers to use Microsoft (NASDAQ: MSFT) Windows and other operating systems alongside the native Macintosh operating system.

The company's stock has experienced steady growth since the late-2008 market crash, with a growth of over 285% since the beginning of 2009, while operating margins for the company increased steadily over the past four years.

Analysts have expected VMWare's growth to continue as cloud computing becomes increasingly popular, thanks to growth in tablet and smartphone usage, greater broadband and high speed wireless penetration, and a transition to more server-oriented IT solutions in homes and small and medium-sized businesses.

VMWare's virtualization solutions put it in an ideal position to capitalize on the growth in cloud computing, and the company has since released several cloud computing solutions for both individual users and businesses to transition their computing needs to cloud-based solutions. The company's vCloud environment offered a number of scalable solutions to companies looking to move to cloud-based computing.

This shift in VMWare's operations was hardly a shift; as a software company specializing in software virtualization, the move to cloud-computing was a no-brainer for the company. The comapny's approach to both secure private clouds and open public clouds has allowed it to capitalize on the consumer and business markets in this growing sector.

Analysts have broadly held an overweight or buy rating on the company for just this reason. For example, Collins Stewart held a buy rating and $108 price target on the company thanks to a consistent and repeatable growth in business.

Another important engine for growth has been vSphere, a virtualization platform targeted at medium-sized business that promises a more secure and customizable private server-oriented cloud computing infrastructure. Some analysts expect vSphere to contribute as much as 90% of the company's future revenue as demand for virtualization services in business environments skyrockets, thanks in part to the increased use of tablets, smartphones, and other lightweight client devices.

Not all is rosy for the company; even as revenues top the $1 billion mark for the first time and the company's operating margin steadily increases, the stock's P/E ratio remains eyewatering. At the close of Monday trading, the stock's P/E ratio was 57.50, and a jump of over 5% of the stock price in after-hours trading to near $91 levels means that shares in the company are hardly a bargain. Like many young software companies with a short market presence, VMWare remains a speculative bet.

Another concern for VMWare is if it is reaching market saturation--a frequently cited risk factor for analysts who worry that virtualization can only penetrate so much of the business market. Market penetration has always been a concern for software companies, yet computer markets have a tendency towards elasticity. A recent survey conducted by InformationWeek shows great room for growth. Of the 396 IT professionals working in private businesses, 48% expected 75% of workloads to run on virtualized hardware in the next 2 years.

There is also a great deal of growth for transporting SAP and Oracle database applications on virtualized platforms, which experts see as a market for enormous potential growth.

With plenty of room for virtualization demand to grow, there is reason to believe that VMWare's quarterly revenue will stay about the $1 billion mark for quite some time; some analysts are predicting revenue to top $5 billion in the next two years and quarterly EPS to rise to 85 cents a share--a jump of over 37% on this quarter's results. Such figures are easy to believe as cloud computing becomes a buzz word in offices around the globe.