IBM's Smarter Planet Initiatives Lay Groundwork for Growth

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A few weeks ago IBM ( IBM ) held its annual Global Technology Outlook (GTO) 2010 where  top executives and scientists laid out  the map for future technology advances. The focus of the GTO is the early identification of significant technology trends which are 1) forward looking (3-10 years out), 2) high impact technologies and game changing products & services, and 3) high potential to create new business. IBM competes with HP ( HPQ ), Oracle Corp ( ORCL ), Microsoft ( MSFT ), Google ( GOOG ) and other tech companies in trying to identify and address key growth areas in technology.

Recently the company has focused on 4 key areas and focused 60% of its R&D on these areas: 1) Emerging Markets, 2) Cloud, 3) Analytics, and 4) Smarter Planet. IBM expects to add another $20 billion in sales by 2015 from investments in its 4 growth initiatives while spending about $20 billion on acquisitions.

We believe IBM has a significant advantage in areas like analytics and smarter planet and further research and investments could result in an upside to our $177 Trefis price estimate for IBM's stock , which is already about 20% above market price.

GTO drives IBM's nearly $6 billion investment in R&D each year. Decisions made at the GTO shape which projects get funded and which companies IBM will buy next year. IBM invested $5.8 billion in research and development last year, 6% of revenue, compared with $3 billion, or 2.4% at HP. IBM relies on its research team for its most significant innovations and augments their efforts with niche acquisitions. Since 2002, IBM has spent about $28 billion on deals compared with more than $43 billion each for HP and Oracle demonstrating its preferences for organic growth relative to its peers.

Smarter Planet Initiative's Large Applicability

IBM's smarter planet initiative was founded in 2008 to provide new ways of monitoring, connecting, and analyzing the systems allowing business, civic and nongovernmental leaders to develop more efficient ways to manage these systems.

For example, Smart Grid solutions use real-time data assimilation & applies behavioral models (like environmental & demand models) to them to optimize 1) dynamic load shedding and demand management, 2) plan for restoration and re-energizing the Grid after a disaster. Other examples of smarter systems include water management systems, solutions to traffic congestion problems, greener buildings and many others.

Smarter Planet solutions require interconnected and interdependent models to represent the physical environment, business & IT, and individuals & communities. Interconnected and interdependent behavioral models will provide the intelligence to predict outcomes and exercise closed loop control. The evolution of such behavioral models will enable achievement of business outcomes with manageable uncertainty. Smarter Planet solutions will require interconnected and orchestrated measurements and models across multiple domains. Thus evolution of the Smarter Planet will accelerate capturing and modeling different worlds at multiple abstractions.

This model-driven assimilation and orchestration of information, processes, analytics & models will emerge as a major opportunity for IBM going forward. Given its higher levels of R&D than most competitors and its scale, IBM stands to gain from this area as it grows.

Upside Potential to IBM

We believe that almost all the segments of IBM will benefit if the Smarter Planet solutions are widely implemented. Below we show the impact on IBM's middleware software business.

We currently forecast IBM middleware license revenues to increase from $6 billion in 2010 to $10.5 billion by the end of forecast period. However, if Smarter Planet gains greater applicability and popularity given IBM's huge R&D spending the middleware license revenues could outpace our growth forecast. The fact that IBM acquired SPSS in the field of analytical software in 2009 for $1.2 billion suggests the firm is expecting high demand for analytics software going forward.

There could be an upside of almost 10% to our $177 Trefis price estimate for IBM's stock if middleware license revenues increased to $14 billion by the end of our forecast period as a result of the Smarter Planet initiative and increased demand for analytics and other middleware software.

To see the impact that various trends in spending on IBM's middleware licenses could have on IBM's stock value, drag the trend line in the modifiable chart above.

Our complete analysis of IBM's stock is here .

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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: GOOG , HPQ , IBM , MSFT , ORCL

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