Broadcom's Big VMware Update: A Threat to Public Cloud Giants?

Most of the hype around Broadcom (NASDAQ: AVGO) centers on its custom AI chips, which have generated rabid demand among several hyperscale customers. The company has positioned itself as both a complement and a competitor to chip giant NVIDIA (NASDAQ: NVDA).

However, investors cannot overlook the success of Broadcom's VMware acquisition and should consider its future potential.

In its own right, the purchase has been a major factor in driving Broadcom’s rising share price. Since completing the acquisition of VMware in November 2023, Broadcom stock has achieved a total return of about 179% as of the June 25 closing price. Now, Broadcom has announced its biggest update to VMware to date.

On June 17, Broadcom announced the availability of VMware Cloud Foundation 9.0 (VCF 9). So, does VCF 9 have the potential to drive the next wave of growth in Broadcom’s software sales and lead to a rally in the share price?

This analysis will break down VCF 9 and examine what industry experts say about it to answer this question.

The Private Cloud and VCF 9: Broadcom’s Massive Update

VCF 9 is Broadcom’s next-generation private cloud platform. When delivering services and performing internal operations, companies have traditionally had two options: using a private or public cloud. Microsoft (NASDAQ: MSFT) Azure is a good example of a public cloud environment.

Companies that run on a public cloud share computing resources owned by another firm, such as Microsoft, when they send in requests. Microsoft's clients share these resources, which process requests. 

This sharing of resources makes data privacy a concern when using a public cloud. Private clouds address this, as computing resources are not shared under this model. Organizations that handle sensitive information, like banks, healthcare companies, and governments, can benefit from the enhanced security offered by private clouds.

VCF 9 itself offers significant benefits over VMware’s past offerings. This includes combining previously separate products under one unified platform. Before, IT teams had to manage these products separately, creating inefficiency. Furthermore, many processes that previously needed manual adjustment are now automated.

Broadcom says this allows IT teams to increase daily productivity by up to ten times. These features help IT teams spend less time managing resources. They can focus more on adding value by building and improving applications. This is significant, as it can allow companies to focus on revenue generation rather than maintaining the status quo.

Analysts Praise VCF 9, but Angry Customers May Still Leave

Multiple industry analysts spoke highly of VCF 9. Matt Kimball of Moor Insights & Strategy noted that VCF 9's automation features are critical. This is because IT teams are seeing their resources and budgets reduced, making increased efficiency key. International Data Corporation (IDC) analyst Gary Chen said VCF 9’s new features are “impressive” and called the release Broadcom’s “Big Bang."

Jerome Wendt, CEO and principal analyst at Data Center Intelligence Group, observes a “pretty sizable gap” between VCF and its closest private cloud rivals. Because VCF 9's capabilities are highly advanced, Broadcom could go after bigger fish. It positions it as a competitor to public cloud providers, not just private cloud ones.

However, Scott Sinclair, an analyst at Enterprise Strategy Group, doubts that VCF 9 will make existing customers less likely to leave. Sinclair believes that organizations have already decided whether to stick with or leave VMware after Broadcom's acquisition.

Updates like VCF 9 are unlikely to change their calculus. However, Broadcom may be just fine with that. Customers have shared many complaints about Broadcom's switch to a more expensive subscription model for VMware. Yet, VMware continued to see customers transitioning to its subscription model last quarter.

VCF 9 Could Position Broadcom to Take Public Cloud Business

Overall, VCF 9 is a significant upgrade over Broadcom’s past offerings. It further cements Broadcom as the preeminent private cloud provider. The company’s market share here doesn’t seem to be under threat. In the best-case scenario, VCF 9’s new automation and cost control features might attract customers from public cloud companies. That would be big for Broadcom.

However, VCF 9 is still in its very early stages. Future earnings calls may reveal whether this actually happens, and whether VCF 9 can help drive the stock higher. Still, the generally positive reception of VCF 9 makes it likely that it will be a net positive for Broadcom regardless.

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