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An Unlikely Powerhouse

By Tim Beyers - Updated Nov 11, 2016 at 4:54PM

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If you want to build wealth, you need to think beyond the obvious.

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.

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Stocks Mentioned

VMware, Inc. Stock Quote
VMware, Inc.
VMW
$119.39 (2.43%) $2.83
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$288.10 (2.06%) $5.80
First Solar, Inc. Stock Quote
First Solar, Inc.
FSLR
$114.47 (5.01%) $5.46
Dell Technologies Inc. Stock Quote
Dell Technologies Inc.
DELL.DL
Advanced Micro Devices, Inc. Stock Quote
Advanced Micro Devices, Inc.
AMD
$97.84 (2.41%) $2.30
Archer-Daniels-Midland Company Stock Quote
Archer-Daniels-Midland Company
ADM
$83.88 (1.23%) $1.01
Dell EMC Stock Quote
Dell EMC
EMC

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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