"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.

Get your clicks with related Foolishness:

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.

Apple is a Stock Advisor selection. Microsoft is an Inside Value pick. The Motley Fool's disclosure policy is virtually tied in the race to determine the World's Greatest Disclosure Policy.