This Is Why VMware Is Setting All-Time Highs

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Shares of virtual computing veteran VMware (NYS: VMW) jumped as much as 6.7% overnight on a fresh earnings report, briefly setting a brand-new all-time high. The stock has bounced like a kangaroo on steroids in 2012, posting a 39% gain so far.

This jump was richly deserved. $1.06 billion of revenue just edged out Street estimates while $0.66 of non-GAAP earnings per share delivered a solid 10% upside to analyst targets. If you prefer to think in terms of percentage growth, sales jumped 24% year over year and the earnings boost works out to 38%.

And we're not looking at Vegas-style accounting trickery here. Free cash flows grew an even stronger 53% over the trailing four quarters. That metric is much harder to fake than the infinitely malleable GAAP bottom line, not to mention even more -- ahem -- flexible non-GAAP figures.


VMware's success is a classic razor-and-blades model. While license sales of the core software are growing nicely in their own right at 15% year over year, the real meat is in the 35% stronger services division. Service sales have surpassed licenses to become the largest contributor to VMware's top line.

CEO Paul Maritz explained that VMware is able to post solid results in the face of economic uncertainty mainly because virtualized IT environments tend to cost less and be more efficient than plain-old hardware-only boxes. "Our customers want, on the one hand, to achieve greater efficiencies under their existing IT operations," he said, "and on the other hand, free up the resources to transform their applications and business models for the future."

The VMware model is a carbon copy of open-source software seller Red Hat (NYS: RHT) in many ways, from the service focus to the trend-breaking cost savings of using VMware virtual machines or Red Hat Linux installations.

These Wonder Twins (separated at birth) provide two terrific ways of investing in the booming cloud-computing trend. VMware sets up the virtualized infrastructure where many of the virtual machines will run Red Hat's software. Add VMware and Red Hat to your Foolish watchlist and read up on the amazing cloud-computing opportunity. Your portfolio will thank you later.

At the time this article was published Fool contributorAnders Bylundholds no position in any of the companies mentioned. Check outAnders'holdings and bio, or follow him onTwitterandGoogle+.Motley Fool newsletter serviceshave recommended buying shares of VMware. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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