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Introduction

International Business Machines Corp. (IBM) is a multinational company based in the United States. It has numerous branches, back offices, and research and development centers all over the world. The company, which is also known as the "Big Blue", has just entered its second century since its establishment in 1911. Since then, the company has continuously innovated, allowing it to grow despite some humps and bumps along the way.

In this article, we will discover how both Big Blue's past and present developments will affect its future stance in the market. Specifically, we will assess its current standing against its major competitors, and then plot its performance in the past year in relation to prevailing industry conditions.

IBM and the Competition

According to data from Morningstar, IBM's closest competitors are Hewlett-Packard (HPQ) and Cisco Systems (CSCO). HPQ is also a provider of technologies and software, as well as solutions and services products, while CSCO designs, manufactures and then sells Internet protocol-based networking.

International Business Machines

Hewlett-Packard

Cisco Systems

Industry Average

Market Cap

$214.8 bil

$25.4 bil

$102.65 bil

-

Price/Earnings

13.6

-4.6

12.56

27.0

Dividend Yield, %

1.7

3.7

2.87

1.2

Debt/Equity

1.1

0.8

0.3

2.7

Return on Equity

74.2

-15.8

16.73

32.7

Current Price

$191.96

$13.53

19.33

X

Estimated Fair Value Range

$237-$256

N/A

$26-$36

X

Stock Valuation

Undervalued

N/A

Undervalued

X

Upside Potential to Reach a Fair Stock Value

24%

N/A

34%

X

Data as of December 9, 2012

Looking at the table above, IBM's capitalization only goes to prove just how big this company really is. However, this should not be the sole basis for analysis. In this regard, its revenue and sales could also be among the good indicators. In 2011, IBM's $107 billion revenue was up by 7% from its 2010 level. Its sales are also expected to increase at the same growth next year, and at around 3% over the next five years. Of course, this will also depend on how the company manages its revenue sources in the future. According to its annual report, Big Blue plans to make software the biggest source of revenue until 2015.

The discounted earnings plus equity model, developed by EFS Investment Partners and applied to these three competitors, suggests the following: Currently, IBM and CSCO stocks are undervalued. EFS's fair-stock-price valuation indicates that these stocks are trading at a discount. IBM has at least 24% upside potential to reach its fair value, whereas CSCO's upside potential is 34%. It is evident that CSCO has provided greater opportunities for traders and investors.

On the other hand, the fair-value estimate does not seem appropriate to HPQ, since it has a negative P/E and has not yet published an estimate of long-term annualized EPS.

What Does the Future Hold for IBM and the IT Industry in 2013?

According to several analyses of the IT industry, the digital era will continue to prosper for many more years to come. This is because of the continuous demand for these digital solutions, as well as the lifestyle trends of many people. According to a report, the IT industry will primarily be driven by at least three major factors, which are the cloud, social networking and demand.

On the one hand, the cloud refers to the utilization of computing resources delivered over the Internet or any network. This has transformed the delivery of IT and business services significantly over the past few years. However, instead of directly responding to the demand for cloud usage, what IBM does is to respond to it with caution. This is because IBM recognized the fact that one of the vital things to be considered in this system is the security or privacy of data. Hence, its services make private clouds for businesses, too. In 2011, the company had at least a million implementations of cloud in enterprises, which analyze at least $100 billion of commercial transactions. In order to address the security concerns of their clients, it has a thousand developers and researchers working on these privacy breakthroughs. In terms of its revenue from the cloud in 2011, it surpassed its 2010 cloud revenue by 3.8 times or 380%, according to its 2011 annual report.

On the other hand, social networking will still be a significant factor in molding the IT industry in the coming years. According to a World Bank report, the time that consumers spend on social media or networking sites increased by 82% last year. This could be a great opportunity for IBM to package their business solutions and services for this great demand.

Thirdly, but by no means least, global demand from emerging factors would be a great opportunity for the IT industry. It is in this light that IBM should tap these emerging economies. In the World Bank Global Information Technology Report, it was stated that by 2020 there will be at least 50 billion connected devices as emerging markets join the trend of the mobile market. For instance, Africa was the second-biggest market for mobile devices in the world in 2011. This trend is even expected to accelerate further within this decade.

As concrete proof of this, IBM reported that growth markets generated almost half of the Big Blue's gross profit in 2011. Specifically, IBM reports $1.9 billion in revenue from growth markets and $2.2 billion in revenue from major markets in 2011. From the point of view of investors, it is quite a relief that IBM is at the forefront of this geographical diversification and able to tap these emerging markets. In 2011 alone, it opened almost 100 new branches and offices in major economic blocs such as the BRIC (Brazil, Russia, India and China). Recently, IBM also opened new offices in the Philippines. This is a double step forward for IBM, since all eyes are on the Philippines right now, because of its higher growth and improvement on domestic demand than other Asian countries.

Conclusion

As stated above, IBM is a good buy in the short run since it is currently being traded at a discount. Hence, for those who are already holding this stock, it would be a wise decision to hold it longer, until it approaches its estimated fair value. In the medium and long term, I would say that the Big Blue is still a great buy, because of the vision of its management, product development and the company itself. Its ventures into emerging markets in the coming years will surely positively contribute to a better performance of this company.

Source: IBM: How Big Blue's Past And Present Build A 'Great Buy' Future