A few weeks ago 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 (
), Microsoft (
), Google (
) 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
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
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.
complete analysis of IBM's stock is here
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