Virtual servers are everywhere these days, and virtualization pioneer VMware (NYSE:VMW) is about to unleash its third-quarter report on an unsuspecting market.

The past three months have been full of ups and downs, including some serious turnover at the top of VMware's corporate ladder. So where is the company going from here? Let's find out.

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)

$225.7

13.2

***

Oracle (NASDAQ:ORCL)

$93.6

16.5

****

VMware

$8.0

33.9

***

Sun Microsystems (NASDAQ:JAVA)

$4.4

11.8

**

Citrix Systems (NASDAQ:CTXS)

$4.0

21.6

****

Data taken from Yahoo Finance on Oct. 20, 2008.

"Not a bad company," says bearish CAPS all-star player BrianRuth, "but 40 times earnings is too expensive for almost anything in an environment like this."

Fellow CAPSer tgauchat concedes that "the stock deserved to be beaten down," but still bestows a thumbs-up rating because "they are still the #1 player and should recover from recent lows -- possibly as a takeover target or leveraged by [corporate parent] EMC (NYSE:EMC)."

What management does:
Rock-solid margins plus massive revenue growth equals a beautiful thing.

Margins

3/07

6/07

9/07

12/07

3/08

6/08

Gross

82.6%

82.8%

83.5%

83.5%

83.3%

83%

Operating

16.8%

16.2%

17.1%

17.8%

15.8%

15.1%

Net

12.8%

12.9%

15%

16.5%

14.6%

14.3%

FCF/Revenue

27.2%

23.8%

24.4%

21.4%

18.6%

19.5%

Y-O-Y Growth

12/07

3/08

6/08

Revenue

88.4%

80.6%

70.9%

Earnings

154.5%

106.8%

89.8%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months. 

The growth curve is a bit short because VMware hasn't been on the public market long enough to go back any further.

One Fool says:
In the last 52 weeks, VMware has nearly doubled its earnings. Meanwhile, the stock price has dropped around 80% since last October.

Put the two together, and VMware's P/E ratio is looking tantalizingly svelte. The company is quietly building value, but Mr. Market doesn't see it. Some investors think that Microsoft will steal VMware's lunch, and others just don't see what the big deal about virtualization is. Several of the Wall Street analysts who follow the company have lowered their next-year growth figures in the last month alone -- and even on those scaled-down expectations, the PEG ratio screams "Value!" at 0.65.

I don't know whether we've reached rock bottom yet, though. This company tends to be volatile around earnings time. Perhaps the steady rhythm of massive growth will eventually beat some sense into the Street.

Microsoft is a Motley Fool Inside Value pick. VMware is a Motley Fool Rule Breakers recommendation. Try any of our Foolish newsletter services free for 30 days.Or just sign up for a free CAPS account to find the identities of your fellow Fools who were quoted above. They might have more to tell you!

Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is the Punxsutawney Phil of financial forecasting.