VMWare (VMW): Why tech efficiency wins

VMWare (NYSE: VMW) became one of the worst IPOs of recent memory after being one of the best. Then it fired its founder and CEO. In August 2007, the stock started trading at $55. It hit $125 two months later as analysts thought revenue would double every year for the next two or three. When it appeared that would not happen, the stock dropped to under $20.

The case for VMWare as a great tech company is its lead in the virtualization software business. It allows one server to do the work of several by running more than one operating task. The number of servers needed to run multiple functions at a company can be cut sharply, saving hardware costs.

VWWare has a large lead over competition in the breadth of its products. Microsoft (NASDAQ: MSFT) has come into the market but by many estimates is a year or two behind.

For the third quarter, sales at VMWare rose 32%, year over year, to $472 million. The company's $.24 EPS was four cents better than expected by analysts. VMW also affirmed its full-year outlook. The market could not have been more happy. The stock was up over 20% after hours.

Doubting the company's prospects has turned out to be a major mistake. It is nearly impossible to find a software product that can add so much efficiency to the operations of its corporate customers and allow them to drive down IT capital expense.

VMWare's promise was there all along. Investor who ignored it just missed out on a big gain.

Douglas A. McIntyre is an editor at 247wallst.com.