Does Broadcom Have a VMware Problem? Goldman Eyes Upside in NTNX

As one of the biggest companies in the world, chip giant Broadcom (NASDAQ: AVGO) operates in massive markets to bring in tens of billions in revenue a year. However, as Broadcom knows well, huge business opportunities breed competition. Marvell Technology (NASDAQ: MRVL) battles against Broadcom in custom artificial intelligence (AI) chips.

Apple (NASDAQ: AAPL) has worked for years to reduce its dependence on Broadcom by internally developing Wi-Fi and Bluetooth chips.

However, a lesser-known company is pushing Broadcom in another key part of its business: VMware.

That firm is Nutanix (NASDAQ: NTNX); they’ve been siphoning off VMware clients as key changes Broadcom made to the platform have caused a big stir. So, what exactly does Nutanix do, and does the firm pose a legitimate threat to Broadcom?

Should investors dump Broadcom for Nutanix, or is there a strong investment case for both stocks?

Nutanix, VMware, and the Shifting Hypervisor Landscape

At their core, Nutanix and VMware help businesses optimize the efficiency of their data center resources. For example, a particular computer may handle one task that utilizes only 10% of its capacity, leaving the other 90% unutilized. Nutanix and VMware’s hypervisor software enables users to divide a physical computer into 10 virtual ones.

Each virtual computer can run a different task using 10% of the physical computer’s capacity. This leads to full utilization of resources that would otherwise sit idle. With companies spending billions on data center infrastructure, maximizing utilization keeps costs down, solving a key business problem.

VMware has traditionally dominated the hypervisor space. Broadcom's switch to a subscription payment model has upset many customers. As a result, they are looking for other providers.

That’s where Nutanix steps in. Over the last four quarters, Nutanix’s revenue growth rate has doubled from 11% to 22%.

Customers moving from VMware have been an essential driver of this. This has helped shares surge around 55% over the past 12 months as of the August 5 close, and Wall Street sees more upside ahead. Goldman Sachs' $95 price target implies big-time appreciation of over 29%.

Let’s dive deeper to understand the opportunity in Nutanix.

Nutanix Is Taking Customers, But VMware Is Standing Strong

Understanding the relative sizes of Nutanix and VMware is vital. Broadcom doesn’t say it outright, but its past financials suggest that VMware accounts for about 65% to 75% of its infrastructure software revenue. With $6.6 billion in infrastructure software revenue last quarter, VMware likely brought in around $4.6 billion.

That’s more than seven times Nutanix’s $639 million revenue last quarter. This is key; Nutanix could substantially grow its business, even if it takes only a slight amount of VMware’s current or prospective customers over the coming years.

Broadcom may not be too worried about this. As it transitions customers to the subscription model, it clearly prioritizes its largest clients. Broadcom only shares data on how many of its top 10,000 VMware customers have switched to subscriptions.

The company has made significant progress, with that percentage increasing from 45% to 87% over the last three quarters.

This prioritization positions Nutanix to take smaller customers from VMware. Last quarter, Nutanix noted that CoLinx LLC, a company with approximately $100 million in annual revenue, switched from VMware to its platform.

Nutanix also landed a Global Fortune 500 company and says it is adding customers of all sizes. Since Broadcom altered VMware, the number of customers the firm adds per quarter has moved from 400 to 600-700.

Overall, Nutanix is clearly benefiting from VMware’s moves. At the same time, the results from VMware have still been strong, and Broadcom shares continue to surge. Thus, there is a solid case to make for owning both stocks.

NTNX: A Strong De-Risking Play on AVGO?

Nutanix has a major chance to attract customers from VMware. This could significantly boost the company's growth and give a strong boost to its shares. While this poses a threat to Broadcom, VMware hasn’t shown any major weaknesses so far.

Nutanix has a significant opportunity to take customers from VMware. This could benefit the firm’s growth, putting a substantial tailwind behind shares. That’s a threat to Broadcom, but VMware really hasn’t shown significant cracks thus far. 

However, if deterioration begins, Nutanix shares could help hedge against a VMware-driven decline in Broadcom shares. If Nutanix takes VMware customers, its stock could disproportionately benefit due to its much smaller business.

Still, VMware is just one part of Broadcom. Its massive AI semiconductor segment has huge tailwinds of its own. Overall, these two stocks are far from mutually exclusive, and both have significant potential to continue delivering for investors as we advance.

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