Apple Teaming Up With IBM Creates A 'Landmark Deal'

| About: Apple Inc. (AAPL)

Summary

Tim Cook and company worked out what was once an unthinkable alliance that will help Apple expand its customer base.

Although it will involve many cross-promotional opportunities, Apple has more to gain than IBM.

As for IBM, the deal adds to a mobile software/services push that has already resulted in a string of acquisitions and product launches.

Victor Hugo was right when he wrote, "There's nothing more powerful than an idea whose time has arrived."

In my article last month, I opined that Apple (NASDAQ:AAPL) is a company with a much higher upside stock price potential than most imagined. There are many drivers to Apple's growth potential, and on July 15 we learned of a new one.

Apple and International Business Machines (NYSE:IBM) announced that they'll cooperate with an agreement to create simple-to-use business apps and sell iPhones and iPads to Big Blue's corporate customers.

In an interview and photo-op, Apple CEO Tim Cook and IBM CEO Ginny Rometty launched a new era of cooperation between what was formerly a bitter rivalry.

"In '84, we were competitors. In 2014, I don't think you can find two more complementary companies," said Apple Chief Executive Tim Cook in the joint interview. "This is a really landmark deal."

The two companies said they'll leverage the expertise of IBM's consultants and relationships with corporate customers to create business apps that offer them simplicity. That is a hallmark of Apple products and their consumer apps.

The apps will draw on IBM's computing services such as security, device management and big-data analytics. Under the agreement, IBM's employees will provide on-site support and service of Apple products inside companies.

Some key points from a Seeking Alpha summary included:

  • Apple, which maintains an outsized share of enterprise mobile hardware activations, has tried hard to grow its business footprint during the Tim Cook era. Aside from any value provided by the new apps/services, Big Blue's credibility and relationships with Global 2000 firms should provide a shot in the arm for Apple's efforts.
  • As for IBM, the deal adds to a mobile software/services push that has already resulted in a string of acquisitions and product launches.
  • The apps will begin to arrive this fall, and IBM will resell iPhones/iPads containing them to clients worldwide.
  • The companies also plan to develop IBM cloud services optimized for iOS. Targeted markets include security, mobile device management (MDM), and big data/analytics. New enterprise-focused AppleCare services will be offered, as will "new packaged offerings from IBM for device activation, supply and management."

Apple is likely to see more immediate benefits by breaking into the enormous business market in a bold new way. The company is likely to expand both sales growth and earnings by the added credibility afforded by the alliance.

IBM is also a big beneficiary. Apple's legendary culture and sterling reputation should add great appeal to its global client base. It's like the best of both worlds for Big Blue and should increase sales of its mobile software products and services.

As I recently wrote concerning IBM's struggles for respect and credibility with investors:

"Few predicted after shares of Apple fell over 40% by mid-2013 that activist investors would pressure management and the stock would recover almost all the loses by June 2014.

"Apple had Tim Cook to guide Apple's turnaround. IBM has Rometty, a 33-year IBM veteran who knows her company like no one else."

"We're a $100 billion ship that's going to turn," she said recently. Rometty speaks to many business leaders and CEO clients, and she claims all are interested in IBM's emphasis on cloud computing, flash storage systems, and efforts to participate in the mobile communications tsunami.

The CEO said IBM's clients "are interested in cloud, to a certain degree. But what they are really interested in is the data and analytics piece. That's going to change how they operate and what they can do."

This landmark deal will galvanize Big Blue's ability to do just that for both old and new clients. This is a game-changing transformational moment for both IBM and Apple.

My 18-month price target for Apple remains at $150. With this deal, it may happen within 12 months.

With my calculated estimates for 10% additional revenue and earnings that IBM should glean from the deal during the coming 12 months, its shares are likely to recapture the 52-week high of nearly $201.

As investors gain confidence in IBM's reconfiguration and association with Apple, my 18-month momentum-driven target price of $220 will be the next upside surprise. IBM has found its mojo, and the profits from the Apple transaction will be exponential.

Disclosure: The author is long AAPL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.