As for VMware (EMC holds a significant ownership share in VMW), after several years of enabling, at least, primitive versions of private clouds for more than 500,000 customers worldwide (including 100% of the Fortune 100), investors are concerned that the proliferation of open source substitutes and public cloud alternatives wil l significantly erode the Company's future earnings power. VMware trades at a historic ally low valuation (a low teen enterprise value to free cash flow multiple, which is half to one third of its recent range), but we think its longer term growth and prof itability prospects are not as dire as the market is implying. While the natural progression for smaller and mid sized business ("SMB") IT departments seems to be the utilization of lower cost, subscription based public cloud services, this will not likely be a winner take all market, especially since EMC has aggressively established itself in the "channel" which is the network of thousands of value added resellers and consultants to SMB IT departments. Further, VMware has a several year head start in cultivating a developer ecosystem, with several thousand applications, many of them mission critical, explicitly supported. In the interim, VMware's product scope is rapidly expanding, thanks to robust reinvestment, where their expertise in abstraction technology puts them at the "tip of the arrow" as data centers become more dependent on the software layer. Further, the value proposition of the public cloud is less robust for larger enterprises, especially those that have long established investments in on site infrastructure, so we believe the barriers to entry into this market segment by VMware rivals and substitutes will be much higher, relative to SMB. In the future, we expect EMC (and VMware) to maintain its competitive positioning in the perpetually changing technology infrastructure industry by continuing to dedicate significant resources towards expanding their product scope – both through acquisition and organically and then maximizing those investments by leveraging their expansive distribution capabilities. So while we recognize the highly competitive nature of enterprise IT innovation, we believe that there is substantial future growth and value still to be recognized in our EMC investment.
From Wedgewood Partners' second quarter 2013 investor letter.