IBM’s Server Business Losing its Importance

Includes: DELL, HPQ, IBM
by: Trefis

Server manufacturers such as IBM (NYSE:IBM), HP (NYSE:HPQ) and DELL (NASDAQ:DELL) are seeing increasing demand for their products as enterprise IT spending resumes after being at an all time low during the recession.

According to a recent Gartner report, global server shipments grew 23% year over year in Q1 of 2010 while the total revenue growth was only 6%, indicating shifting demand toward lower priced hardware. IBM, whose servers are among the costliest, is feeling the heat from low-priced server manufacturers. IBM was the only one among the top four server manufacturers to lose global market share and consequently its top position to HP in Q1 of 2010.

We believe that even if IBM server sales continue to perform below the market average, this will have a minimal impact on the Trefis price estimate of $175 for IBM’s stock. Below we discuss IBM’s server business in detail and why the impact of fewer server sales will be negligible on the stock.

Servers Less Than 3% of IBM’s Stock

IBM’s primary server offerings to its enterprise customers include System z, Converged System p (Power Systems) and System x.

System z is IBM’s costliest server with an average selling price (ASP) of around $240,000 that is typically used for critical applications such as Enterprise Resource Planning (ERP) and financial transaction processing. Converged System p is a UNIX-based mid-range offering with an ASP of around $24,000. In comparison, System x which is IBM’s most widely used x86 server is the cheapest of the three products with an ASP of $4,000.

Although IBM dominated the global server market (in term of revenues) with its leading products, we estimate the server business to constitute only a fraction of IBM’s total value. Most of IBM’s value comes from its software and services business which together constitute more than 85% of the $175 Trefis price estimate for IBM’s stock.

Little Downside To IBM’s Stock From Server Business Losses

For 2010, we forecast IBM’s System x, converged System p and System z shipments to be about 900,000 units, 138.000 units and 13,000 units, respectively. Even if IBM server shipments in 2010 were to decline by 20% due to fierce pricing competition from HP and Dell, this will result in less than 1% downside to IBM’s stock.

You can modify the forecasts for IBM’s server shipments above to see what impact they have on its stock price.