Let me tell you a story about innovation, superior growth, and killer sharks with laser-beams on their frickin' heads. And along the way, you'll find the best tech stock I know -- and it's so cheap, it's ridiculous.

Virtual machines are sweeping through data centers the world over, simplifying hardware setups and bringing down power consumption and management costs in their wake. VMware (NYSE:VMW) started this sea change years ago, and remains virtually unchallenged at the top of the fledgling industry's heap.

But the stock gets about as much respect as Rodney Dangerfield's dog. In the last six months, VMware's shares have lost around a stunning 70% of their value, underperforming not only the flagging market as a whole but also most of its rivals, large and small:


6-Month Price Change

Trailing P/E Ratio

CAPS Rating





Microsoft (NASDAQ:MSFT)




Citrix Systems (NASDAQ:CTXS)








Sun Microsystems (NASDAQ:JAVA)




Yahoo! Finance and Motley Fool CAPS as close of Nov. 19, 2008.

While several of these companies look attractive today, none can match the buying opportunity we see in VMware right now. Let me show you three things that Mr. Market seems to have forgotten when it comes to VMware's value:

1. Mr. Market forgot about growth
The proper price for any stock must take future growth into account. VMware is priced as if virtualization software already ran out of room to grow. Hold that thought -- we'll get back there in a second.

With an estimated PE-to-growth ratio of around 0.70, VMware is the kind of stock that value investors drool over. The stock needs to take around a 40% leap to grow into a reasonable ratio of 1. This is very cheap in comparison to other virtualization players.

2. Mr. Market forgot about moats
VMware has built a moat around its business model, miles wide and filled with angry mutant sharks. Having essentially created this market on its own, VMware remains far ahead of closest competitor Microsoft's virtual server and hypervisor technology -- and keeps adding business-worthy features at an accelerated pace.

And just in case a biggie like Mr. Softy or Oracle tries an all-out marketing assault to muscle its way into VMware's castle, sugar daddy EMC (NYSE:EMC) holds over 80% of VMware's shares and can flex its own marketing muscle in response. Granted, EMC is much smaller than Microsoft and Oracle, but it's still a multibillion dollar company and can provide some protection. Sometimes it's nice to have big-time corporate backing.

3. Mr. Market forgot about market size
Back to the size of this market: Right now, VMware's trailing sales stop at a pesky $1.8 billion a year, while Citrix and Microsoft have much lower market share in virtualization.

Let's pretend that virtualization software was free (some of it is, some isn't) and always will be. In that alternate reality, VMware's chief source of income would be training and support services for administrators of its virtual machines. That means taking market share from the hardware guys as IT management becomes more involved with hypervisors and virtual hardware -- and less with supporting a plethora of IBM (NYSE:IBM) machines. One large box from Big Blue can run dozens of virtual machines. That means less IBM support and more VMware support for every one of those data-centers-in-a-box.

IBM alone made billions of revenue in support services last year, and that doesn't even account for other hardware makers or stand-alone support specialists. According to IDC, the combined annual market for server support reached somewhat higher than $10 billion in 2007. I think it is likely this will be higher for 2008. So if virtualization takes a fraction of those sales, the undisputed leader of that market should see tremendous growth in its own right.

There's much more to this exciting growth story: eco-friendly features at a time of green thinking, enthusiastic support from the chip makers, the whole cloud computing trend, and much more. To top it off, management just renewed its view of 42% revenue growth or better in 2008 despite the wacky economy. Imagine what this stock could do in a good year.

Buy low (that would be right now) and sell high (or possibly never). And that's how you get rich in the stock market.

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