Blockchain: Look Toward Blue-Chip Technology Companies For Investment

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Includes: IBM, INTC, MSFT
by: Roman Luzgin

Summary

Blockchain's market size is going to increase rapidly to more than $2 billion by 2021.

Investing in blue chips is an attractive way to safely gain from blockchain development.

Main tech corporations to include in a blockchain portfolio are Microsoft, IBM and Intel.

Blockchain is definitely a game-changer for many operational procedures across all kinds of businesses. The technology was introduced in 2008 as a basis for Bitcoin cryptocurrency but later evolved to an independent technology. Blockchain's estimated market size from now to 2021 is expected to increase from $210.2 million to a hefty $2312.5 million representing 61.5% CAGR, which, according to PWC, will "reduce or eliminate many categories of validation and verification in leading enterprises." Clearly, many start-ups emerged to cover this market and they received significant amount of investment from funds and firms which are interested in the technology. However, a list of established blue chip companies can be considered by any type of investor to be attractive as an option to invest in blockchain's inevitable development. The most appealing companies of this list tend to be Microsoft (NASDAQ:MSFT), IBM (NYSE:IBM) and Intel (NASDAQ:INTC), which have made significant progress in blockchain adoption and development.

Technology overview

First of all, let us briefly look at how blockchain works. The main principles behind the technology are distributed databases, transparency and, importantly, computer logic which makes all the operations automated and computer-fast. The use of blockchain is similar to databases: it is a digital, cloud-based system which contains certain information, like a book of orders, where incomes and outcomes are recorded. In the case of blockchain, information is mostly transactions or obligations made by the users of a particular network. For instance, a company orders a product with a certain price agreed by a customer through a blockchain system. The system automatically recognizes all the conditions like price, date of promised delivery, amount to be paid, and other information related to the subject, and stores this information within computer code. Next, when product is delivered and payment is made, the system automatically recognizes the transaction and changes the ownership rights.

The main benefit of the system is that all this data is seen and automatically validated by all users of this system in any point of time. Therefore, unlike traditional paper or digital ledgers which are currently used in institutions like banks, no central authority is needed for blockchain ledgers, since transactions are validated automatically through a special consensus process managed by all users of a certain community.

Information is stored in blocks of computer code, and each block includes data about previous transactions encoded so that every participant can review and validate, but only a participant with a private key can access the exact details of a specific operation, such as the type of this operation, counterparties involved, etc. Moreover, any new operation, which can occur in the network, is automatically added to the ledger, and after that point, it cannot be deleted or changed without authorization and common recognition.

Since a ledger in a blockchain system is replicated and validated many times for every user automatically, records of transactions and ownerships are identified permanently in every ledger. This makes any transaction highly secured, quick to perform and easy to verify. For instance, a typical stock exchange operation can be executed within microseconds, with subsequent ownership settlement performed instantly, instead of days. Therefore, the total cost of ownership is reduced, settlements are faster and clearer, and security is enhanced.

The scope of implementation possibilities is too large to mention every case, but the most rapid traction for blockchain technology has been in the capital markets industry, where blockchain can help develop contractual relationships, diminish counterparty risk, decrease settlement times to seconds, and drive reporting transparency of corporations to a new level.

Microsoft

Until recently, tech giants have shown little interest in blockchain taking a wait-and-see approach. One of the first tech companies to consider blockchain is Microsoft, which has shown leadership in terms of integrating blockchain in products and offering external solutions. For instance, Microsoft is now collaborating with the R3 consortium (the collaboration of R3 and major blue-chip banks), providing cloud services and platforms for its participants. Microsoft also created a special team to conduct blockchain research and to support collaboration. Additionally, Microsoft offers a Blockchain as a Service (BaaS) solution to help corporations build their own systems on the basis of Microsoft's Azure cloud service, the very cloud platform which provided about 28% of the corporation's revenue in 2016 (3Q ended). Moreover, good Q4 results seem also to be driven by the revenue from cloud services, which amounted to $6.7 billion.

I believe Microsoft's cloud facility is a huge advantage to the company's ability to further develop blockchain products. It enables solving, at least to some extent, the problem of blockchain scalability emphasized by Buterin (founder of the Etherium blockchain system), since all systems are built on the flexible and scalable Azure platform.

Microsoft's first partnership using BaaS was with Bank of America Merrill Lynch (NYSE:BAC) to build and test "blockchain-powered exchanges between businesses and their customers and banks." The aim of the project is to increase efficiency and diminish risks in treasury operations of both Microsoft and Bank of America. Besides, Jemima Kelly from Reuters evaluates this collaboration as a creation of a framework that "could eventually be sold to other businesses." From this case, it becomes clear that Microsoft is not only considering further blockchain development, but is making efforts to commercialize the service as much as possible. Thus, the strategy seems to be beneficial, as future solutions can be sold as distinct products driving cloud services revenue to a new level.

Applying reverse valuation with a dividend discount model, it is estimated that the current price of Microsoft ($65.5 as of January 30th) is justified by approximately 9% growth over the next five years and 4% subsequent growth. These numbers seem to be reasonable considering 10% growth of Intelligent Cloud Revenue in 2016. Therefore, any decrease in stock price below $64-65 level can be considered as a buying opportunity for blockchain investors.

IBM

IBM is another example of a tech giant involved in the blockchain business. The corporation started to be interested in the technology in its early stages alongside Microsoft. In general, the strategy of IBM can be described as an effort to build a blockchain framework usable for businesses and other users. To accomplish this, Big Blue is working on an ecosystem to support the development of "networks on the Linux Foundation's Hyperledger Fabric." This ecosystem already is joined by CloudSoft, Ernst & Young, Everledger and several other companies which have different cases of blockchain usage. Ginni Rometty, IBM chairman, president and chief executive officer, even emphasized the importance of IBM blockchain services for banks and hospitals in the 2016Q3 statement, saying innovations are led by IBM cloud.

Additionally, the company's experts in blockchain technology give consultations on how to establish the blockchain application in any company. For example, IBM provides a certain number of educational materials and support as well as learning modules and courses on the blockchain ecosystem. Help is provided through a Hyperledger Project channel on Slack where code can be checked by experts and where participants try to support each other in blockchain understanding. I consider these efforts to be very beneficial to the future of the company because it clearly covers the need for support and education, which can be easily commercialized, once the adoption of the technology by businesses gains momentum.

Thus, it is clear that while Microsoft offers its own solutions based on Azure cloud, IBM mostly provides necessary support in order to help companies build their own systems on the basis of their cloud and offers educational services, like courses and modules on developerWorks. This enables investors who consider both companies in their blockchain portfolio to slightly diversify even within one framework.

Applying reverse valuation with a dividend discount model to the current price of IBM ($176 as of January 30th), we can see that the price is justified by approximately 3% growth over the next five years and 4% subsequent growth. In light of the corporation's clear exposure to a rapidly growing blockchain market, these numbers seem to be undervalued. Therefore, any price level can be considered a buying point with obvious caution about global market trends.

Intel

In turn, Intel has taken another strategy to enter the blockchain market. First of all, the corporation introduced a different way to achieving validation consensus in a blockchain environment, meaning other mining process. The solution offered by Intel is called proof-of-elapsed-time (PoET) which is aimed to compete with bitcoin's proof-of-work (PoW) algorithm. It has been proven that the process developed by Intel is more flexible and provides options for private blockchains to use different specific algorithms to meet their needs. Therefore, it will be easy for Intel to sell its product to companies which desire practical blockchain implementation today.

Moreover, new consensus solutions require a certain type of computer environment made possible only by Intel. This can actually be the main advantage for Intel, since software provided induces hardware sales, the strategy which is highly exploited by such corporations as Apple (NASDAQ:AAPL) and has also been implemented by Google (NASDAQ:GOOG) (NASDAQ:GOOGL).

Additionally, Intel provides core code for blockchain systems, developer tools and "simple arcade game" which demonstrates how blockchain systems can be implemented.

One example of Intel's work is a smart contracts platform offered by the corporation and currently tested by eight banks from the R3 consortium. The platform enables "trading, matching and settlement of U.S. Treasury Bonds." Thus, the blockchain solutions offered by Intel cover a variety of applications showing their ability to become attractive products for the companies which consider blockchain implementation. As a result, I believe Intel's revenues will be positively impacted by the corporation's blockchain exposure.

Applying reverse valuation with a dividend discount model to the company's data, it is seen that the current price of Intel ($37.80 as of January 30th) is justified by slightly less than 9% growth over the next five years and 4% subsequent growth. These numbers seem to be reasonable, and as long as price stays below $40 in the near future, Intel can be considered as a buying opportunity for blockchain investor.

Reverse DDM valuation

Other companies

Regarding other big tech companies, their involvement in the blockchain market still remains unclear and not specifically determined. Thus, there is no evidence of Apple researching or developing any blockchain solutions, and cryptocurrency-related applications have been removed by the tech giant from the company's AppStore. In turn, Google has not developed blockchain systems itself, but the company has made investments through Google Ventures in some blockchain-based companies. For instance, Google has invested in the start-up Ripple which aims to help with financial transactions settlement. The service is being seriously considered by big banks, evident by $55 million raised from Standard Chartered (OTCPK:SCBFF), Santander InnoVentures and others in the middle of 2016. Moreover, interest has been shown by Mozilla to use Ripple as a "better experience for payments on the web." Other companies like Uber (Private:UBER) or Airbnb (Private:AIRB) have shown no interest in blockchain so far, which can be possibly explained by the threat they feel from the technology. Thus, the interest in blockchain from other tech giants is not currently clear, while uncertainty remains on whether they need to make any considerations for its usability.

Conclusion

Overall, it is evident that even though blockchain was not highly attractive to tech companies (except for start-ups), some big players in the market have already started to pay attention to the technology. Thus, giants such as Microsoft, IBM and Intel, already offer solutions based on blockchain systems, which will enable other businesses to innovate their own processes utilizing the support of these established corporations. Therefore, I believe that in this stage of development investing in the aforementioned companies can be a potential strategy to gain from possible blockchain popularity in the future, while still being more on the safe side with diversified established corporations compared to start-ups.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MSFT, INTC, IBM over 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.

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