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An Unlikely Powerhouse

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Right now, there in your chair, sipping coffee and reading this story, you're polluting the atmosphere. It's not your breathing -- it's your browsing.

A new McKinsey & Co. study found that the energy required to power all of the world's computers, data storage, and communications networks is expected to double by 2020. Already, today, it accounts for roughly 2% of the world's greenhouse gas emissions.

Can you imagine? No matter how much they work to contain power consumption, AMD (NYSE: AMD  ) , Dell (Nasdaq: DELL  ) , and EMC (NYSE: EMC  ) are, by their very existence, helping to pollute the planet.

It's a problem VMware (NYSE: VMW  ) was built to solve.

That's right; the simplest and most cost-effective soldier in the war against global warming isn't First Solar (Nasdaq: FSLR  ) or Archer Daniels Midland (NYSE: ADM  ) , but a software company dedicated to virtualization. Score one for Silicon Valley.

Virtual reality for the real world
Obviously, we need to reduce the amount of power consumed by our personal computers and networks. But the answer isn't better chips, thinner servers, or smarter storage arrays -- although that helps. We need fewer servers, less infrastructure. We need to consolidate horsepower.

And that's where VMware and virtualization come in.

Virtualization software allows any piece of computing machinery to act as more than one machine by dividing available processing power, storage, and memory into distinct chunks. That enables those machines to be used to their fullest capacity. And when machines are running at capacity, networks need fewer of them and, thereby, less power.

This cost-cutting quest has what cartoonist Scott Adams calls a 'second-order benefit' -- it reduces carbon emissions. Pundits, realizing this, have given the process a name: server consolidation. (Genius, eh?)

And it's become a big business. A recent Goldman Sachs survey of 100 technology buyers found that server consolidation is their top 2009 priority. Meanwhile, researcher IDC says that the broader virtualization services market is on track to more than double from $5.5 billion in 2006 to $11.7 billion by 2011, or 16.3% annually.

Let me hear your rebel yell
At Motley Fool Rule Breakers, we're looking for the ultimate growth stocks -- and that means finding the stocks that will change the world. VMware fits that bill -- literally. It meets five of the six signs of a Rule Breaker. They are:

  • Top dog and first mover in an important, emerging industry: VMware created virtualization software as we know it and still leads the market.
  • Sustainable advantage: VMware has patents, technical know-how, a seven-year head start, and a large installed base.
  • Strong past price appreciation: VMware debuted in August 2007, and it nearly doubled before the market-wide slide dropped it below its IPO price. Whoops.
  • Good management and smart backing: VMware may be under assault from Microsoft (Nasdaq: MSFT  ) , but new CEO Paul Maritz -- the guy who wrote the playbook for how to kill Microsoft's enemies -- is calling the plays now.
  • Strong consumer appeal: Developers and IT managers love VMware.
  • Considered grossly overvalued: Look no further than Motley Fool CAPS, where investors continue to balk at the price tag for VMware's rebellious potential. "Earnings growth will be moderate until 2010, even though virtualization will be one of the most sought after tech in IT space ... A P/E (09) of 25 at current price ($19) is high. So, I won't buy it until it hits $13 or so," wrote CAPS investor blackstreet in October.

Think of these as a subjective stock screen, criteria that helped Fool co-founder David Gardner to achieve a decade of 20% returns in the real-money Rule Breaker portfolio. And these criteria are why David recommended VMware to Rule Breakers subscribers in the June issue and why, at current prices, this stock is a screaming buy.

Our rebel portfolio has taken a beating with the global recession. Most of our recent picks are losing big -- including VMware. But David's not giving up on it. Neither am I. Neither should you.

Your browsing is polluting the atmosphere. VMware is working on that. And we're working on building excellent portfolios for the long haul. VMware is part of that as well.

Click here to try Rule Breakers free for 30 days. You'll get our dispatches from Silicon Valley, our special reports, and every one of our recommendations, all on our dime. And, of course, there's no obligation to subscribe.

Fool contributor Tim Beyers didn't own shares in any of the stocks mentioned in this article at the time of publication. He's also a member of the Rule Breakers team, which counts VMware among its recommendations. Dell and Microsoft are Inside Value picks. The Motley Fool's disclosure policy has a big bark and an even bigger bite. Beware, stock polluters.

Read/Post Comments (2) | Recommend This Article (15)

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 December 08, 2008, at 10:30 AM, oldpbass wrote:

    Let's keep in mind one very important point. While I'm sitting at my computer and sipping coffee, I'm not driving a car, golf cart or navigating a boat...etc. These computers save a ton of 'raw' energy plus the benefits of expanding one's mind. Surfing the net doesn't do much for personal excercise but doesn't polute the air nearly as much either. It's like the old advertisement: "You can pay me now, or pay me later."

  • Report this Comment On December 11, 2008, at 1:59 AM, Parpy2 wrote:

    Microsoft didn't forget how to take out competitors when Mr. Maritz left the company. VMWare produces an outstanding product, I'm using it right now :) But it is all built around a simple and small piece of code known as a hyper visor. Other than that, it is nothing special and we already see several competitors (not just Microsoft which should be enough). I wouldn't be surprised if an open source hyper visor steps up that is able to also virtualize Apple's OS X (something VMWare can't/won't do). That is the next level that would make many who use VMWare move along without a second thought.

    VMWare as a company has many problems. The brain drain this year is very concerning - especially the recent departure of their security chief. Plus the level of VMWare's entrenchment pales when compared to the heydays of Lotus (123), Ashton-Tate (DBase), Word Perfect, IBM (O/S2), Netscape (Navigator), Citrix (Metaframe) and Borland. Those were all 'real' powerhouses reduced to ashes in alarmingly short periods of time even for tech companies (ok so only a division of IBM was reduced, but it still fits). Citrix was/is even a close business partner of Microsoft's - I remember their stock price diving practically overnight when Microsoft's Terminal Server came built into Windows Server.

    It simply doesn't matter what Mr. Maritz knows, virutally all (pun intended) of VMWare's current clients are going to switch when Microsoft's free built in product is a bit more polished. It's already pretty far along:

    I'm new to - interesting site. I was trying to find out why VMWare's stock has gone up almost 25% in the past few days on zero news, I guess one-sided articles like this explains things assuming your reader base is high enough. Have fun while it lasts.

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