International Business Machines (NYSE:IBM) is like a respectable middle-aged gentleman who, at a ripe old age, falls in love with a twentysomething. Such things are legion; what is less common, what is actually pretty amazing is when such an asynchronicity succeeds. In that sense, IBM is a standing wonder among the companies trading in the American markets. From a purveyor of old-fashioned computer hardware, the company avatared into a developer of marvelously sexy Enterprise software, even matronly call centers.
In this article, I am going to figure out for myself how well it did succeed.
IBM, as is well known, is a multinational technology company providing information technology (NYSE:IT) products and services worldwide. It operates in 5 segments: Global Technology Services, Global Business Services, Global Financing, Systems and Technology and Software. The company surpassed a revenue of $100 billion in 2011 and is positioned at 19th in the Fortune 500 list.
Despite the economy being sluggish, IBM reported better-than-expected 4th quarter results. The quarterly revenue stood at $29.30 billion with net income of $5.8 billion. The company managed to increase its net annual profit by 5 percent in 2012, even though revenue fell by 2 percent from $106.9 billion a year ago. This means that the company has significantly reduced its operating costs over the year. If we look at the revenue breakup, majority of it came from the services business followed by software and technology business. This shows that the company is slowly moving towards services and consulting business. IBM posted an EPS of $5.39, which pushed shares up over 4% on the day of announcing its quarterly results on Jan 23, 2013. The past 1 month average return is much higher than the industry average. IBM is now only a few dollars away from its 52 week and an all-time high and has gained consistently in the past few months. The return on equity of the stock is also better than the industry average along with the EPS which signifies better utilization of the shareholder's money.
High weightage on Dow Jones Index
Since Dow Jones is a price weighted index, IBM with a share price of above $200 is the largest weighing stock in the index. The price movement of IBM greatly affects the movement of the index and can confuse the minds of the investors. To quote an example, a $1.85 gain in the stock on 6th March roughly accounted for 32% of the Dow's overall gain. This is a considerable movement in my opinion and IBM should consider splitting of shares to bring it at par with other stocks.
New Focus, Newer Areas of Growth
According to the IBM president and CEO, Ginni Rometty, the various growth initiatives taken during the year like diversification into emerging markets and efforts in cloud computing and smarter planet systems helped the company sail smoothly during the tough period. This is true owing to the fact that the revenues from these new sources increased by 25 percent and business in growth markets like India and China increased by 4 percent year on year. IBM's recent announcement to develop its cloud services and software based on open architecture is a welcome move as it is a major catalyst for innovation and hugely beneficial to end customers.
The Peer Market
With the recent launch of Windows 8 and the surface tablet, Microsoft is slowly adapting to the changing business needs. Its revenues has been hit due to declining PC sales. Microsoft has a strong presence in the software products segment but lot of investment needs to come up in emerging technologies such as big data and cloud computing. It remains to be seen whether Microsoft can give a stiff competition in the coming years with its strong R&D focus and the performance of the newer products.
Accenture is a tough competitor for IBM as it already has a strong market share in the software services segment where IBM is slowly focusing upon. Accenture has some of the most loyal customers and enjoys high market credibility due to its ability to deliver high performance at low prices.
Future and the Road Ahead
The strategic initiative of IBM to slowly come out of the hardware business and move towards a new business relying on software products and services paid off in a big way. Right from the deal to buy Pricewaterhouse Coopers' consulting business a decade ago and deciding to exit the PC business, the company has slowly secured its ground by betting its future in finding solutions to business problems. IBM is better positioned to thrive in a tough environment than most of the technology companies. The branding of "Building a Smarter Planet" which aims to improve focus areas like traffic systems and power grids of food production is also an excellent move. By this strategy, IBM has gained investor confidence by differentiating itself in an environment where every company is trying to make a mark building greener and eco-friendly solutions.
The world is moving towards the digital age at an enormous pace. Almost every industry is increasing its IT budget for better operational efficiency. Cloud computing, big data, social media and mobile are the new trends in the digital age. IBM aims to invest more in such areas which is going to be the key driver for securing its future. Research has always been IBM's strength and with lots of new technologies coming up, IBM will be the frontrunner of developing innovative business solutions. The future of IBM lies in how effectively it designs and implements these solutions, along with continued focus in emerging markets. Looking at the overall growth prospects of the company, I would recommend IBM a strong 'buy'.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.