IBM Or Hewlett-Packard: Which Tech Behemoth Should You Buy?

| About: International Business (IBM)

As the personal computer market is shrinking, hardware giants like International Business Machines (NYSE:IBM) and Hewlett-Packard (NYSE:HPQ) are diversifying into newer areas to attain growth. Among the most talked-about markets in IT solutions are cyber security and cloud computing. Both these segments have been growing at a brisk pace. Not just IBM and HP, but other big companies such as Oracle and Microsoft are also moving into these markets.

IBM increasing its product portfolio via acquisitions

IBM is focusing on products with higher margins and higher growth, such as mobile communications, cloud computing and security solutions. The ideal way to step into such markets is through acquisitions and partnerships. IBM's cash position has enabled the company to make a few acquisitions and its established brand has helped it ink agreements with leading players. Such strategic moves of IBM will position the company in a better position for the future.

An acquisition by IBM to broaden its portfolio in mobile communications software was that of Xtify. A recent analysis by Gartner predicts that mobile payment transactions may exceed $235 billion by 2013. This is a growth of 44% over last year. The rise in transactions is mainly due to an increase in the number of mobile users, a number expected to reach 245.2 million by the end of 2013. This market is predicted to be worth $998.5 billion by 2016 at a CAGR of 83.7% from 2012 to 2016.

With IBM acquiring Xtify, it is in a better position to capture this booming mobile communications and payments market. The mobile analytics market is not left untouched by IBM either, as it acquired Now Factory recently. The exponential growth of mobile gaming and video streaming will bolster the market for mobile analytics software in the future, and IBM is looking to make its presence felt here.

More investments from IBM

IBM's dedication to the cloud is illustrated by its investments in the platform and synergies with companies providing cloud services. The global cloud market is predicted to grow by 126.4%, with growth in the European market expected to be around 300%. IBM is all set to capitalize on this growth by venturing into Europe with its investments and partnerships.

IBM recently announced that it is investing $8 million in Spain for cloud data centers. IBM is confident about the returns on such investments across the globe and targets around $7 billion in revenue by 2015 just from the cloud computing market.

IBM servers have gained market share from Dell recently, as IBM was selected as the first choice provider by Avalon, a leading Croatian web solutions company. IBM servers with IBM networking will now power Avalon's high-end cloud infrastructure. Avalon serves clients in various European countries and hosts around 16,000 websites.

"The IBM solution was the best one to fit our needs," said Damir Mujic, CEO of Avalon. "IBM's System x server platform together with IBM networking provides a reliable, flexible and cost-effective IT infrastructure that scales as we grow and can handle diverse workloads. In addition, with IBM we avoid integration issues arising if we have to deal with different companies delivering different parts of an overall solution."

Hence, with a solid product portfolio that is growing with acquisitions, IBM looks well-positioned to capture the cloud and mobile communications markets.

HP is stepping into security solutions

Hewlett Packard is feeling the heat as we see the PC market decline. The company's future looks quite gloomy. Its third-quarter results were not good either as revenue declined 8% to $27.2 billion compared to last year. The company is trying to add a few high-margin services to its portfolio to drive growth.

To boost its performance, HP is all set to strengthen its portfolio with security services for the web, mobile, and BYOD (bring your own device) environments. In September, the company released its TippingPoing next generation firewall. TippingPoint has a higher network security performance and control over web apps and mobile. As cyber security and threats are becoming one of the major concerns for corporate customers, TippingPoint could benefit as it addresses this market.

It would be interesting to see if HP markets TippingPoint as an independent product or joins hands with various mobile companies, data centers, and app providers to boost its sales. The company might benefit in terms of sales if it enters into partnerships.

The security market has witnessed 6.1% growth this year to $2.13 billion. Analysts estimate this market to grow by 500% and reach $10.17 billion by 2017. These figures have certainly caught HP's eyes and that's why it is strengthening its security portfolio.

The bottom line

While IBM is successfully transforming itself into a services company, HP has just started following this route. Hence, conservative investors should consider IBM for their portfolio as it has $10.4 billion in cash on the balance sheet, pays out a dividend that yields 2.10%, regularly buys back shares, and has a conservative payout ratio of 25%.

On the other hand, HP is running in losses and its annual earnings growth expectation for the next five years is a meager 0.67%. Hence, investors with a higher risk appetite looking for a turnaround play could consider HP for their portfolio.

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.