AWS Threat To VMware Business Is Overblown

It’s not often you get Wall Street talking about its mistakes, but Deutsche Bank has admitted that it overestimated the AWS threat to VMware, and has raised its rating for shares of the virtualization giant.

VMware shares are now rated buy, up from hold.

With the firm saying that the company’s server virtualization business has the potential to thrive in a world of cloud computing. Amazon Web Services will not directly have an effect on VMware business, as its on-site server market is apparently more durable than the original forecast.

In a note to clients titled “Overcoming our AWS fears”, analyst Karl Keirstead wrote:

“We’ve spent much of the last two years worried about VMware’s on-premise core server business given its maturity and the threat from AWS/Cloud adoption [Amazon Web Services]. This upgrade should be seen in the context of growing evidence that large enterprises are embracing a hybrid model, materially lowering the out-year risk profile of VMware shares.”

Getting back to the hybrid model that companies use for both local servers on-site and cloud servers off-site, Keirstead said that enterprises are slow to migrate their IT workloads to the public cloud:

Which is a notable change from what seemed a year or so back:

“We believe that large enterprises are migrating IT workloads to the public cloud model at a slower-than-expected pace and are electing to ramp spending to modernize their on-premise IT infrastructures. Our recent checks agree that VMware technology is proving to be more durable than they would have thought 12-18 months ago.”

The analyst also showed cautious optimism towards the VMware and AWS strategic partnership that was announced in October, which enables access to Amazon Web Services computing power for VMware customers:

“We are positive on the deal for both parties. It is hard to imagine how this could end up being a net negative for either party. We conclude that the stock can still work even if the initial lift from VMware Cloud on AWS is modest.”

As a result, the firm has raised VMware target price to $120, up from $110. This new target is 24% higher than the Monday close, even as company shares continue to outperform the market.

They have risen 23.2% year to date.