This Is Why You Buy VMware

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"Partisans might object to their stock being tagged as richly valued, yet even at its much reduced price, it's still exceedingly the case," Foolish colleague Rich Duprey wrote in panning VMware (NYSE: VMW  ) yesterday.

His point is, at first blush, a good one: This tech titan's multiple is otherworldly, well beyond what its peers command. Peers such as Microsoft (Nasdaq: MSFT  ) , IBM (NYSE: IBM  ) , and Sun Microsystems (Nasdaq: JAVA  ) . Trouble is, the P/E says very little about the disruptive nature of VMware's underlying business. Rich crystallizes the misconceptions here:

The market researchers at Gartner say that 90% of the servers running virtualization software still use VMware. But that's not as great as it sounds, because only 1% of the server market falls into that category. [Emphasis added.]

Not as good as it sounds? I call that great news, Rich. Let's review the scenarios where VMware adds the most value:

  1. Server consolidation. Too many firms are facing tight IT budgets. For them, virtualization helps squeeze more out of their existing server infrastructures so that when older systems get unplugged, they needn't be replaced.
  2. PC virtualization. Want to run Windows on your Mac? VMware's Fusion is the tool for you.
  3. Cloud computing. When applications move into the cloud and mash together to create services, virtual machines -- software environments that act like chunks of hardware -- become a necessity. Creating virtual machines is what VMware does better than anyone else.

Allow me to repeat that: Creating virtual machines is what VMware does better than anyone else. This is why David Gardner recommended the stock in the June issue of Motley Fool Rule Breakers; VMware has raving fans. Here's one quoted in a response to a ComputerWorld blog post that all but predicts the death of VMware. Poster AlphaAllen writes:

Have you ever used VMWare in the enterprise space? We're a Microsoft shop, but we use and will continue to use, ESX server by VMWare. [There are] a number of reasons for this, most have to do with Hyper-V having huge gaps in [its] feature set as of 1.0.

Virtualization is an open market and IT managers and software developers will turn to the tools that help them most. To keep winning, VMware will have to keep spending. It will have to keep innovating as other former targets of Mr. Softy have -- Apple (Nasdaq: AAPL  ) and Intuit (Nasdaq: INTU  ) , most notably.

Expect VMware CEO Paul Maritz -- the man who best understands how Mr. Softy plays hardball -- to do precisely that. There's too much at stake.

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Fool contributor Tim Beyers owned shares of IBM at the time of publication. He also hunts for the best of tech as a contributor to Motley Fool Rule Breakers, which counts VMware among its holdings. Here's how to try this market-beating service free for 30 days. Get access to all of Tim's Foolish writings here.

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Comments from our Foolish Readers

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  • Report this Comment On September 04, 2008, at 4:00 PM, nhsrikanth wrote:

    "The market researchers at Gartner say that 90% of the servers running virtualization software still use VMware. But that's not as great as it sounds, because only 1% of the server market falls into that category."

    And this according to Rich Duprey is a negative?

    Let us say one more percent of the server market decides to virtualize over the next year. Who is the top dog? The one with 90% share of previous success.

    Also, Softy can no longer depend on bundling its products as part of forcing enterprises to OS upgrade (like it did with IE). Case in point is the failure of Vista to make a dent in Enterprise desktops. Oracle has major battles at too many fronts (in core DB space, in middleware space, in Applications space) with other titans for it to focus on this new area.

    All this bodes well for VMWare.

  • Report this Comment On September 04, 2008, at 6:24 PM, midas784 wrote:

    You Analyst should stop pimping technology stocks you do not have a clue about. It is because of people like you that poor investors who bought in at $100-$124 are suffering. They have lost 70-80% of their investment.

    Yes, VMW is a nice piece of technology but it comes at a very lofty price tag. "oh use VMW to multiple your servers w/o buying hardware..."

    But when you use VMW ESX to create 3 servers out of one $2k-3k hardware, you are talking about $5k license fees and $1000 in annual maintenance cost. And BTW, this does not include the cost of hiring a VMWare pro who is paid at least $100-150k a year. So essentially to save 6k in hardware cost, you are spening so much more with VMW.

    And space and energy saving is all crap. Using IBM Blade Center we have about 100+ blade servers in a single rack and only 16 power-supplies are required to power them. Each decent blade server can cost from $2500-3000.

    And this is the reason why the stock has suffered so much.Unless they come up with affordable prices to really help the bottom-line, the stock will continue to languish and eventually will suffer the same fate as Netscape / Real who just couldn't compete with the big boy MS. With Windows 2008 server due in Fall and its hyper-visor VM technology and close ties to Citrix and its XEN VM, VMW will have no choice but to reduce its price. And so will the stock. Can you believe this stock commanded a market cap of $45-50 billion not too long ago, that was like 40x SALES and a PE of over 200. The 3rd biggest software company in the world in less than 1 year of becoming public. And Cramer and folks said BUY BUY BUY, VMW to $200, VMW to $300. IMO, it is still expensive and I still hold the opinion which I did back then that the stock's fair value is in low 20s and that too if market conditions does not deteriorate any further, which I think it will.

    Good luck.

  • Report this Comment On September 04, 2008, at 7:29 PM, virtualgrl wrote:


    >>3 servers out of one $2k-3k hardware

    20-40 and not 3 is the number you're looking for.

    >>Unless they come up with affordable >>prices to really help the bottom-line,

    To start off with, what part of "free" doesn't sound affordable?

    >>Using IBM Blade Center we have >>about >100+ blade servers in a single >>rack

    And you're assuming that the rest of the world also uses just hundred machines? And that too just blades ?

  • Report this Comment On September 05, 2008, at 8:42 AM, cjlebel77 wrote:

    First off, I'm no expert in stocks, or with Virtual PCs/Servers. However, I have used VMWare on and off for the last 5+ years, and have used Virtual PC for the past 2 or so years (since Microsoft bought it).

    Anyways, with Microsoft now giving away Virtual PC for free, and including the Virtual PC for servers (forget the actual name of it) with their server OSes, I can't see VMWare being too successful.

    The only place that VMWare has a chance to dominate is on non Windows OSes. That is until Windows servers catch up, which they seem to be doing slowly over the past few years.

    Yes, VMWare may be better than Virtual PC, but on Windows, why would you want to spend money on some VM software, when it's already included?

  • Report this Comment On September 05, 2008, at 10:30 AM, merinoo wrote:

    "Allow me to repeat that: Creating virtual machines is what VMware does better than anyone else." Meh - maybe 2 years ago this was true. I'd say VMware manages virtual machines better at the moment, but this will quickly change. There is an open, standard virtual machine definition being developed, and will allow enterprises to easily run and migrate virtual machines from one vendor's product to another. And the other major players are rapidly developing their products to match feature for feature with VMware's. It may take 2 years, but virtualization technology will be a commodity, and inherent in every vendor's product. And free.

    To stay in the game, VMware will have to dig much deeper than hardware/software virtualization, and will have to root themselves more in infrastructure management. They are well aware that they have a short amount of time before everyone catches up in the virtualization space, which explains their recent cloud computing initiatives.

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