VMware's newest Amazon partnership proves that the $65 billion company can thrive in the cloud wars after all, says Wall Street

Yuya Shino/Reuters

VMware CEO Pat Gelsinger

• VMware is showing steady growth with a 14% year-over-year revenue growth this past quarter, driven by its revitalized cloud strategy - an area in which it had historically been seen to be weak.
• Analysts laud a recent partnership with Amazon Web Services, the leader in cloud computing, as being a sure sign that VMware is on the right track.
• The concern was that the cloud would hurt VMware's traditional business, which has always been in the data center. But the trend towards so-called hybrid cloud has benefitted VMware, analysts now say.
• VMware is a subsidiary of Dell.

When the cloud first started to loom over Silicon Valley, some Wall Streeters were concerned VMware - a publicly-traded, $65 billion subsidiary of Dell that helps companies manage their server infrastructure - couldn't weather the storm.

Amazon Web Services, Microsoft Azure and Google Cloud overshadow the cloud landscape, as more companies move their computing and data storage systems off their servers and onto these major platforms. More recently, Kubernetes, a popular cloud computing technology started by Google engineers, was thought to make VMware's flagship technology obsolete by helping developers manage their infrastructure more directly.

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Now, things are turning around, as Wall Street analysts say that VMware's cloud strategy is gaining momentum, as proven by its newest partnership with Amazon's market-leading cloud business. With AWS Outposts, companies can bring hardware into their data center, powered by VMware software, that integrates with the Amazon cloud.

Indeed, this past quarter, VMware reported 14% year-over-year revenue growth, beating analysts expectations, driven in large part by its revitalized cloud strategy. VMware isn't necessarily growing like crazy, but it's still making steady gains.

"There is fear on Wall Street that the cloud is probably bad for VMware's business. I think that view is premature and and misses what VMware is doing," Edward Parker, Director and Data and Cloud Infrastructure Analyst at BTIG, told Business Insider. "The fact that AWS announcement uses VMware software on premise is a validation they're making real progress."

The hubbub around AWS Outposts has underlined VMware's hybrid cloud strategy. While in the past, VMware has focused on traditional on-premise data center infrastructure, it has evolved its strategy to take public cloud into account, as well, in what the industry calls hybrid. Beyond AWS Outposts, VMware also announced it would acquire two hybrid cloud-adjacent startups, CloudHealth and Heptio.

"What's interesting about the [Outposts] announcement is VMware in some regards has been considered a legacy enterprise software provider," Parker said. "They are very clever in terms of pivoting the business in this hybrid cloud challenge."

Sanjay Poonen, COO of VMware, calls the partnership, with on-premises, private cloud and public cloud services coming together, a "Berlin Wall movement." VMware has been touting hybrid cloud all along, and its goal, Poonen says, is to be the leader in that space. Its biggest competitor in hybrid cloud, analysts say, is Microsoft.

"We've been proving that hybrid cloud is the best option," Poonen told Business Insider. "The reality is customers want the best of both worlds. It was our recognition that [Amazon is] the leader in the public cloud, and that brings us to them. It was their recognition that we're the leaders in private cloud, and that brings them to us."

Read more: Wall Street says Amazon and VMware are teaming up to take down Microsoft in the cloud wars

Parker says that he's heard from cynics that this is merely delaying the inevitable, and the Amazon style of public cloud will eventually swallow everything, hybrid or no. While he shares some of those concerns, he says the market is heading towards hybrid cloud.

"Cloud is the defining trend, but it's becoming more and more evident that it can't solve all problems for all company," Parker said. "I still think cloud will grow and proprietary on-premise will slowly decline, but it's going to be a long process, but for the most part, companies will have to deploy on both in the near future. That's what VMware is trying very hard to solve."

Also, VMware and Amazon's partnership is mutually beneficial, say boosters. Take AWS Outposts: Companies can use VMware Cloud to run their infrastructure, or run AWS cloud on-premises, marking a first for Amazon in running its cloud services in the data center.

"I think that is a partnership that is going to be more and more front and center," Daniel Ives, managing director of equity research at Wedbush Securities, told Business Insider. "It was significant for the industry as a catalyst for the hybrid cloud evolution to hit its next phase of growth."