Is Broadcom Facing a VMware Challenge? Goldman Sees Potential in NTNX

Nutanix and the Challenge to VMware’s Dominance

As one of the largest companies in the world, chip giant Broadcom (NASDAQ: AVGO) operates across massive markets, generating tens of billions in revenue annually. However, with such significant business opportunities come fierce competitors. One of these is Marvell Technology (NASDAQ: MRVL), which competes with Broadcom in custom artificial intelligence (AI) chips. Additionally, Apple (NASDAQ: AAPL) has been working for years to reduce its reliance on Broadcom by developing its own Wi-Fi and Bluetooth chips.

But there's another company that is making waves in a critical area of Broadcom's business: VMware. This firm is Nutanix (NASDAQ: NTNX), which has been attracting VMware clients due to changes in the platform that have caused some customers to reconsider their choices. The question is, what exactly does Nutanix do, and could it pose a real threat to Broadcom?

Investors are also wondering whether they should consider moving away from Broadcom in favor of Nutanix or if both stocks still offer strong investment potential.

Nutanix, VMware, and the Changing Hypervisor Market

At their core, Nutanix and VMware help businesses optimize the efficiency of their data center resources. For instance, a computer may only be using 10% of its capacity for a particular task, leaving the rest unused. Hypervisor software allows users to split a physical computer into multiple virtual ones, each running different tasks while utilizing the same physical resources. This maximizes resource use and reduces costs, which is a major concern for companies investing heavily in data centers.

VMware has long dominated the hypervisor market. However, Broadcom's shift to a subscription-based payment model has led to dissatisfaction among some customers, prompting them to seek alternatives. That's where Nutanix comes in. Over the past four quarters, Nutanix's revenue growth rate has doubled, rising from 11% to 22%. A significant portion of this growth has come from customers switching from VMware.

This trend has driven Nutanix's stock up around 55% over the past 12 months, and analysts like Goldman Sachs see more upside ahead, with a $95 price target suggesting over 29% appreciation.

Nutanix Is Taking Customers, But VMware Is Still Strong

Understanding the scale of Nutanix versus VMware is crucial. Although Broadcom doesn’t explicitly state it, financial data suggests 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 generated around $4.6 billion—more than seven times Nutanix’s $639 million in revenue during the same period.

Despite this, Nutanix has the potential to grow significantly even if it captures only a small share of VMware’s current or future customers. Broadcom may not be overly concerned, as it focuses on transitioning its largest clients to the subscription model. The company shares data on how many of its top 10,000 VMware customers have switched to subscriptions, with the percentage rising from 45% to 87% over the last three quarters.

This strategy positions Nutanix to attract smaller customers. Last quarter, Nutanix reported that CoLinx LLC, a company with approximately $100 million in annual revenue, moved from VMware to its platform. Nutanix also secured a Global Fortune 500 company and continues to add customers of all sizes.

Since Broadcom changed VMware’s structure, the number of new customers Nutanix adds per quarter has increased from 400 to 600–700. While Nutanix is clearly benefiting from VMware’s shifts, VMware’s results remain strong, and Broadcom’s shares continue to rise. This suggests that there is a solid case for holding both stocks.

NTNX: A De-Risking Play on AVGO?

Nutanix has a significant opportunity to attract customers from VMware, which could drive substantial growth for the company. If this happens, Nutanix’s stock could see a significant boost. However, VMware hasn’t shown any major weaknesses yet.

If VMware starts to experience issues, Nutanix could serve as a hedge against a potential decline in Broadcom’s shares. Given that Nutanix has a much smaller business, it could benefit disproportionately from taking over VMware customers.

Still, VMware is just one part of Broadcom’s business. The company’s AI semiconductor segment also has strong tailwinds. Therefore, both Nutanix and Broadcom are far from being mutually exclusive investments. Each has the potential to deliver value to investors moving forward.