The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (TheStreet) -- The new buzzword of all buzzwords these days is "cloud computing." While not entirely a new concept, there are many companies racing and jockeying to be the first to either define or "re-define" what it means.
As you can imagine, it gets a bit complicated. It is broadly understood that "the cloud" means "the Internet." Think about it, when have you ever seen a network diagram demonstrating a route to the Internet that does not include a cloud clipart? It seems simple enough except when you couple it with the term "computing" -- an entirely new standard for activity that helps corporations deliver the level of services whether to their customers are internally within the enterprise. Follow TheStreet on Twitter and become a fan on Facebook.
From that standpoint, there aren't many companies that do it as well as virtualization king VMware, much less better.
As noted, the race for that tight space is pretty intense -- imagine a Nascar track where the cars are four-wide and bumper to bumper with one lap to go and no time to pit. In addition to VMware, the race includes names such as Microsoft, Oracle, Red Hat, EMC and of course Salesforce.com.
These are just a few of the software players in this space. We have not even mentioned search giant Google and hardware players like Hewlett-Packard. As an investor, the challenge is trying to figure out which companies stand to benefit more than others by producing solid market-beating performances.
At the top of my short list is VMware. The company helped affirm my analysis as it reported first-quarter earnings that topped analyst estimates, yet again.
The Quarter That Was
Last Wednesday, the company reported Q1 earnings and revenue that beat analyst expectations due to improvements in demand for cloud services. The company reported an increase in revenue of 25% as well as a 15% increase in license revenue from the same period of a year ago. What I thought was remarkable was that not only did its operating margin for the quarter arrived over 32% on a non-GAAP basis, but the company also logged an impressive 53% increase in trailing free cash flow -- one that registered at $2.1 billion.
The company earned 66 cents per share -- jumping 38% on an annual basis as sales surged 25% to $1.06 billion. These results compare to analysts' expectations of 60 cents per share on revenue of $1.028 billion.
What these results tell me is that corporate customers and the enterprise continue to demonstrate their trust and loyalty to VMware's services for their mission-critical solutions -- which includes databases, ERP systems, email as well as collaboration systems. So the question is, in such a highly competitive landscape with such dominant names, what's so special about VMware?
What has always stood out for me regarding the cloud was the fact that the company (unlike its rivals) has what is called a hybrid concept -- or a focus on integrating the needs of the customer and allowing them to create and manage applications needed to run their businesses effectively.
What also sets it apart from EMC or even Salesfore.com is that the company also provides clients with flexibility and portability to move applications between clouds without rewriting them -- from private to public clouds and back. This is while also offering exceptional performance and security as well as the ability to deliver exceptional quality of service that is scalable with business operations.
Because of its success the company has become a target of names such as Oracle and in particular Microsoft, which wants to take a big chunk out of VMware's lead in virtualization -- which is currently at 75 percent of the server market according to a recent survey.
The question that investors grapple with is can the company still grow into its current valuation? This has to do with its lofty price of $111 and a price-to-earnings ratio of 66. That said, it remains clear that investors feel comfortable betting heavily that the company can yet continue to drive the shift into the cloud. But will the stock behave commensurate to those expectations?
From an investment standpoint the company's balance sheet and in particular its strong cash position as well as investments of $5.2 billion continues to demonstrate why investors should remain confident that VMware not only is sound from a technical standpoint, but fundamentally, the business is operating on all cylinders.
However, to consider VMware at these levels, one must decide how patient they are willing to be and whether they are looking for value or growth.
Investors must also be willing to bet that IT cloud migration will continue to accelerate at its current pace. From that standpoint VMware will certainly remain one of the safer bets to place. But it's going to take some time -- the preferred holding period is a year to possibly 36 months.