VMware Problems Are VMware Problems

| About: VMware, Inc. (VMW)
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VMware (NYSE:VMW) managed to tank the whole cloud sector yesterday, with weak guidance sending the stock plummeting over $21/share in a single session.

The irony is that VMware isn't really a cloud company. It sells virtualization software, which is just an element in cloud computing. Its problems stem from parent EMC's efforts to develop a cloud strategy.

The downdraft was enhanced by news that VMware will cut 900 jobs. But on the same call, CEO Pat Gelsinger said, the company also plans to hire 1,000 new workers.

EMC (EMC), which owns most of VMware, also fell 4% in sympathy with VMware's report. This despite an earnings beat, 54 cents per share against an expected 52 cents.

Other cloud stocks also fell in price, including Rackspace (NYSE:RAX) and Red Hat (NYSE:RHT).

What's crazy is not that shares of VMW fell - that was overdue. What was crazy were the falls elsewhere. Cloud is moving from its hype cycle to its delivery cycle.

VMware was spun out as the virtualization field got hot. Its vSphere is the hottest virtualization system around, saving companies millions because it lets them reduce their server count, and use commodity servers. No more one machine, one job. Now if a job takes 2 machines that's where it runs, and if it only needs half a machine's capacity that's how much it takes. With virtualization you can dynamically assign loads and run your whole server room at higher efficiency. Instead of keeping 10 percent of your servers running at a time, you can keep half of them running, or more.

But virtualization isn't cloud. It's an enabling technology for cloud. EMC is still in the process of building a cloud solution, which consists of a full cloud infrastructure, a platform supporting various languages, and applications from partners.

It began this last year by moving CEO Paul Maritz out last year, replacing him with Gelsinger. Maritz is now heading up something called the "Pivotal Initiative," within EMC, combining units from both VMware and EMC including Springsource middleware, the Cloud Foundry Platform project, and Greenplum, the company's big data operation.

Sometime later this year Maritz' group will roll out a full cloud solution. But EMC has not yet revealed how it will handle this new group. Will it sit within EMC, or will it be spun out as VMware was spun out?

So VMware could have fallen because investors realize it's not the cloud they were looking for. Their best play, if they want to buy into cloud software, is to stay with EMC. The other big question, of course, is whether Maritz can build the open source bits-and-pieces necessary to forge a true cloud solution, whether under EMC's name or some other name.

VMware, as an enabling technology, now needs to be evaluated on its own, as separate from the cloud hype, and Gelsinger's charge should be to maximize earnings. That's a good reason to lower the estimate you're willing to pay for VMware shares - it's no longer the growth story it was. But it's not a reason to go negative on cloud.

In general, the cloud space is driving forward. Red Hat and Rackspace are doing great. IBM (NYSE:IBM) has expanded its own cloud services so customers can take advantage of both cloud economics and the applications running on its mainframes.

Cloud, in other words, is still at the start of its growth curve, although virtualization is becoming more of a commodity. I personally like Red Hat because they've gotten well down the road to cloud with their OpenShift platform, which brings Red Hat Enterprise Linux applications fully into the cloud. And this will be a growth sector for some time to come.

VMware has been pulled into the garage for retooling, but the cloud race goes on. And it's still wildly profitable.

Disclosure: I am long RHT, IBM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.