A Potential Downside Scenario for IBM


IBM's ( IBM ) two most important businesses are middleware software and technology services, in which it competes with firms like Oracle ( ORCL ) and Red Hat. Middleware and technology services account for roughly 45% and 24% of the company's stock value respectively. IBM is also among the global leaders in business systems and competes with hardware vendors like HP ( HPQ ) and Dell ( DELL ) in the server market as well as EMC ( EMC ) and NetApp (NTAP) in the storage market.

9% Downside Scenario: $169 Trefis Price Estimate for IBM

1. IBM Middleware License Revenues : We currently forecast that revenues from the sale of IBM's middleware licenses will increase from about $5.5 billion in 2010 to over $10 billion by the end of the Trefis forecast period. There could be however be a 5% downside to our $185 price estimate for IBM stock if middleware license revenues increase at the historical rate (which is lower than the growth rate we forecast) reaching close to $8.5 billion by the end of our forecast period.

2. IBM Middleware Software EBTDA Margin : We currently forecast that middleware software EBTDA margin will decrease from about 36% in 2010 to nearly 34% in 2012 and then remain constant through the remainder of our forecast period. There could be 4% downside to our $185 price estimate for IBM stock if margins continue falling, and reach pre-crisis level of 30% by the end of our forecast period.

We have a $185 base price estimate for IBM's stock , implying a premium to market price.

See our full analysis for IBM stock here

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: DELL , EMC , HPQ , IBM , ORCL



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