The Cloud-Computing Winner Wall Street Can't Get Enough Of

One of the great maxims of traders and Wall Street pros is to follow the "smart money."

I'm not much for the thesis that institutional shoppers tend to make smarter investing decisions, but many of you who've read my ruminations on insider buying say you'd also like to know how the Big Money is betting. Your wish is my command.

Next up: VMware (NYSE: VMW  ) . Are institutions bullish or bearish when it comes to this cloud computing infrastructure supplier?

Foolish facts

Metric

VMware

CAPS stars (out of 5) ***
Total ratings 2,184
Percent bulls 91.6%
Percent bears 8.4%
Bullish pitches 330 out of 383
Highest-rated peers TeleCommunications Systems, Radiant Systems, Oracle

Data current as of Feb. 15.

Of the stocks to have benefited from the rise of cloud computing, few have benefited more than VMware. The virtualization specialist, whose software helps break a physical server into several different virtual servers, has grown revenue close to 30% annually over the past three years. Profits are up 20% a year over the same period.

If Fools remain undecided about the stock -- they give it three of five stars -- it's because the trip to higher highs has come with more than a few detours. Just last month, the company blew away estimates only to open lower. Valuation concerns spooked traders and investors alike, and the stock remains down slightly year-to-date.

Longer term, bulls see upside. Cloud computing is too big a trend to ignore and cloud computing doesn't happen without virtualized servers, argues Fool co-founder and Chief Rule Breaker David Gardner.

"As much as I admire the neat trick of issuing more shares to buy more oil tankers, I would far better bet on a high-tech company helping to drive the great computing revolution of our time," David wrote in naming VMware the winner of a Motley Fool Battle Royale back in October.

Institutional ownership history

Top Owners

2008*

2009*

2010*

Latest*

Jennison Associates

184,700

4,936,782

11,291,014

11,291,014

Fidelity Investments

8,997,340

7,256,633

4,288,933

4,288,933

BlackRock

91,490

1,589,034

3,918,440

3,918,440

Wells Capital Management

753,746

101,088

2,778,212

2,778,212

Intel Capital

6,143,476

2,375,000

2,375,000

2,375,000

Top 25 Total

33,045,870

40,583,284

46,881,299

46,881,299

Source: Capital IQ, a division of Standard & Poor's.
*Indicates the number of shares owned.

It's funny to see Wall Street agree with a Fool, but the numbers don't lie. Big Money investors have been snapping up shares of VMware since the days when David first recommended the stock to our Motley Fool Rule Breakers members. Those who bought then are up about 36% versus a 4% loss for the S&P 500 over the same period.

Institutions have bought into the rally. As a group, the top 25 have added shares every quarter since at least September 2009. More recently, Will Danoff of the highly regarded Fidelity Contrafund (FCNTX) has been a big buyer. He and team opened a position of 262,700 shares in the December quarter, Morningstar reports.

Competitor and peer checkup

Company

Institutional Ownership

Insider Ownership

Citrix Systems (Nasdaq: CTXS  ) 95.15% 0.53%
Intel (Nasdaq: INTC  ) 62.00% 0.05%
Microsoft (Nasdaq: MSFT  ) 64.11% 4.04%
VMware 16.88% 0.14%

Source: Capital IQ. Data current as of Feb. 16.

VMware's ownership profile doesn't say much, if only because parent EMC (NYSE: EMC  ) still owns close to 80% of the business. Add institutions' 17% stake to that and there isn't much room left for Big Money buyers to get in.

So be it. Fools who want exposure to this dynamic business can get it by buying shares of EMC, which look startlingly undervalued once you factor in the value of its interest in VMware. Here's a closer look at the thesis, courtesy of my Foolish colleague Eric Bleeker.

Do you agree? Disagree? Let us know how you would rate VMware using the comments box below. You can also recommend other stocks for me to evaluate by sending me an email, or replying to me on Twitter.

Interested in more info on the stocks mentioned in this story? Add Citrix Systems, Intel, Microsoft or VMware to your watchlist.

BlackRock, Intel, and Microsoft are Motley Fool Inside Value picks. VMware is a Motley Fool Rule Breakers recommendation. Motley Fool Options has recommended members purchase Intel calls and open a diagonal call position in Microsoft.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Oracle at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Microsoft, Oracle, and Intel, in which it also owns a call option position. The Fool is also on Twitter as @TheMotleyFool. Its disclosure policy is smarter than the average bear.


Read/Post Comments (2) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 16, 2011, at 10:49 PM, Coefficient wrote:

    I agree! But I'm not in VMware for the short term, I think that as the economy grows the entire tech industry will get back to it's more rapid growth pace.

  • Report this Comment On February 17, 2011, at 1:56 PM, bowhunte59 wrote:

    VMware has been a solid investment but, with the limited available funds I have I deceided to purchase EMC. Great potental @ more resonable stock price.

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