VMware (NYSE:VMW) reports on the second quarter of its fiscal 2008 tonight. The last period was another smashing success, but then the company decided to change horses midstream. Where's this disruptive software business going under new CEO Paul Maritz?

What Fools say:
Here's how VMware's CAPS rating stacks up against some of its peers and competitors:

Company

Market Cap (billions)

Trailing P/E Ratio

CAPS Rating

Microsoft (NASDAQ:MSFT)

$238.8

14.9

***

International Business Machines (NYSE:IBM)

$176.7

16.8

***

VMware

$14.2

63.0

***

Sun Microsystems (NASDAQ:JAVA)

$7.4

12.5

***

Citrix Systems (NASDAQ:CTXS)

$5.1

24.8

****

Data taken from Motley Fool CAPS and Yahoo Finance on July 21, 2008.

I cede the floor to Foolish compatriot and fellow All-Star CAPS captain TMFBreakerWade for the bear case on VMware:

To say that there was friction between EMC (NYSE:EMC) and Miss Greene is an understatement. To make matters worse, this EMC board [appoints] one of their own, as the new CEO for VMW. Factor in the increasing competition from Mr Softy, and this one could get real ugly, real fast.

Another All-Star player who goes by the moniker 12bagger notes:

... we're seeing the same price range as the first post-IPO buyers back in August '07, after a round trip to 125 and back. Meanwhile the company has been growing nicely for a year and its story, as far as I can tell, is intact. [...] It's certainly at a better valuation now than it was a year ago.

That one's for the bulls.

What management does:
There was a dramatic year-ago drop in net margins and earnings growth last quarter, thanks to a massive surge in R&D and sales efforts. Scaling up your infrastructure like that sure ain't cheap. Expect the bottom line to improve a bit more slowly than the top for a while, since we're talking about permanently larger costs rather than a one-shot financial item.

Margin

12/06

3/07

6/07

9/07

12/07

3/08

Gross

82.5%

82.6%

82.8%

83.5%

83.5%

83.3%

Operating

17.7%

16.8%

16.2%

17.1%

17.8%

15.8%

Net

12.2%

12.8%

12.9%

15%

16.5%

14.6%

FCF/Revenue

32.3%

27.2%

23.8%

24.4%

21.4%

18.6%

Growth (YOY)

3/07

6/07

9/07

12/07

3/08

Revenue

100.4%

89.7%

89.5%

79.7%

69.4%

All data courtesy of Capital IQ, a division of Standard & Poor's. Margin data reflects trailing-12-month performance for the quarters ended in the named months, while the growth figures are for single quarters, year over year.

One Fool says:
VMware's leadership in the market for virtual server software is massive; the only threat on the horizon comes from Microsoft, and Mr. Softy will have to play catch-up for years. Maybe even forever.

See, VMware created its own market, and it's been grinding away at improving the virtualization concept for years, while the competition was busy worrying about Windows Vista, Linux upstarts, Google's (NASDAQ:GOOG) online dominance, and other pesky day-to-day items. Citrix bought its way into this sector when it picked up open-source project XenSource last fall. VMware's technical lead and dominant mind share may prove too much for even mighty Microsoft to overcome.

This stock has never been cheaper, and the competition remains far, far behind. If and when Microsoft, Citrix, and the others come up with seriously competitive products, I predict that they will have to carve out niches that effectively grow the virtualization market, rather than stealing share from VMware. Come rain or sleet or driving snow, this will be a giant of the exploding virtual machine market for years to come. You might as well jump aboard the bandwagon before Mr. Market comes to his senses.

Microsoft is a Motley Fool Inside Value selection. VMware and Google are Motley Fool Rule Breakers recommendations. Try any of our Foolish newsletter services free for 30 days. Or just sign up for a free CAPS account to read more from the fellow Fools quoted above -- and share your own thoughts!

Fool contributor Anders Bylund owns shares in Google but holds no other position in any of the companies discussed here. He is a longtime user and occasional administrator of technologies from every company mentioned. You can check out Anders' holdings if you like, and Foolish disclosure is the Punxsutawney Phil of financial forecasting.