Virtual server expert VMware (NYSE:VMW) reports fourth-quarter earnings Monday afternoon. The third quarter was an ambivalent experience, but I can still give you at least three solid reasons to buy this stock today. But first, let's start with a look at the competition.

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

VMware

$8.3

32.2

 ***

Microsoft (NASDAQ:MSFT)

$152.1

9.2

 ***

Oracle (NASDAQ:ORCL)

$84.0

15.1

 ****

Citrix Systems (NASDAQ:CTXS)

$4.2

23.9

 ****

Sun Microsystems (NASDAQ:JAVA)

$2.7

N/A

 **

Data taken from Motley Fool CAPS on Jan. 22, 2009.

"Great company and balance sheet but I think it's overpriced at the moment," said CAPS member Bronscap in early December, thus reflecting the general gist of the VMware bears. "I'd buy it if it was a bit cheaper." Of course, the stock has actually gained a couple of bucks since this post popped up in early December.

"VMware is the market leader in a field they created," countered dusaint last November. "While heavyweight players have recently entered the fray, they are all many years behind the curve, and VMware shows no sign of slowing its rate of innovation."

What management does:
The financial law of large numbers dictates that no hypergrowth will last forever. No matter how you ramp up your sales department and squeeze efficiency out of every pore of the operation, it's much harder to double up as a bigger company with nearly $1.8 billion in revenue than it is for a smaller company with just a few hundred million dollars in sales. That's what's happening to VMware's growth rates at this stage, the same way the law of large numbers has put the squeeze on Google (NASDAQ:GOOG) over the last few years.

Margins

6/2007

9/2007

12/2007

3/2008

6/2008

9/2008

Gross

82.8%

83.5%

83.5%

83.3%

83%

83.2%

Operating

16.2%

17.1%

17.8%

15.8%

15.1%

16.1%

Net

12.9%

15%

16.5%

14.6%

14.3%

14.4%

FCF/Revenue

23.8%

24.4%

21.4%

18.6%

19.5%

28.8%

Y-O-Y Growth

12/2007

3/2008

6/2008

9/2008

Revenue

88.4%

80.6%

70.9%

55.6%

Earnings

154.5%

106.8%

89.8%

50.2%

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.

One Fool says:
With the caveat of the "large numbers" law in mind, VMware could see itself rejuvenated in the next few quarters and years. Virtualization is still a relatively new concept, in many ways yet to achieve critical mass. Look at the obvious opportunities that VMware's services offer today, and you'll see what I mean:

  • Increased return on hardware investments. Running multiple virtual machines on fewer hardware boxes can squeeze more utilization out of the processors you've got. Companies save money.
  • Greener operation. Fewer physical servers means less power draw, and in turn less data-center cooling. Save money and save the environment, all at once.
  • Flexible system configurations. Cloud computing wouldn't work without virtual servers on the back end. As cloud services like Amazon.com's (NASDAQ:AMZN) EC2 platform gain traction, they also grow the addressable market for virtual servers.

There's more, but that will have to wait for another article. Suffice it to say that VMware stands to grow a heckuva lot more, and it's got a built-in boost from eco-friendly, cost-saving IT strategies that have a natural appeal to CTOs and CFOs alike.

This company has yet to fall short of the median Wall Street analyst consensus forecast. Because VMware's customers often end up saving money, I don't see that streak ending during a budget-cutting bonanza like this one.

Virtually irresistible further Foolishness:

Microsoft is a Motley Fool Inside Value pick. VMware and Google are Motley Fool Rule Breakers selections. Amazon.com is a Motley Fool Stock Advisor pick. 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 owns a few Google shares, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like. Foolish disclosure is the Punxsutawney Phil of financial forecasting.