A week or so ago I described why a properly implemented hypervisor-based overlay virtual networking data plane is not a scalability challenge; even though the performance might decrease slightly as the total number of forwarding entries grow, modern implementations easily saturate 10GE server uplinks.

Scalability of the central controller or orchestration system is a totally different can of worms. As I explained in the Scaling Overlay Networks, the only approach that avoids single failure domain and guarantees scalability is scale-out control plane architecture.