IBM (
IBM
) competes with Oracle (
ORCL
) and Red Hat in the middleware software market.
IBM's advanced computing device Watson, "designed to quickly
answer complex questions with pinpoint precision", recently
defeated human competitors on the popular TV show
Jeopardy. Watson, developed by IBM's scientists over the last
three years and named after IBM's founder Thomas J. Watson, Sr.,
has taken data analysis capabilities to a new level.
According to IBM, "The computing engine (used in Watson) is much
more than a simple Web search engine" and "understands the
nuances of 'natural language' that humans use every day". Watson
"does not just search on keywords, but actually understands
idiomatic expressions, puns, linguistics and can parse clues and
come up with answers".
Watson incorporates open technologies such as UIMA (Unstructured
Information Management Architecture), Eclipse, and Apache Hadoop
and is powered by IBM POWER7 processor, which is specifically
designed to meet the demands of workloads like IBM's DeepQA natural
language processing technology. Watson's success is attributed to
both its advanced processing capabilities (hardware) as well as its
efficient algorithms for information management (software). We
believe that this type of technological advancement puts IBM in a
position for upside over the long-term.
It is the software advancements achieved during the development
of Watson that will be most beneficial to IBM, rather than the
addition of new and more powerful POWER7 processors to its
portfolio. We estimate that IBM derives nearly 46% of its value
through its middleware software offerings to businesses around the
globe, while server sales contribute a mere 3% to our
$185 price estimate for IBM's stock
. Our price estimate stands roughly 10% ahead of market price.
See our full analysis and $185 price estimate for
IBM
Upside for IBM's Middleware Software Business
Middleware is a type of software "plumbing" used to connect
different software applications that need to share
information. Middleware is commonly used by businesses that
have a variety of separate software systems to make information
integration easier. By making it easier to integrate and
share information, businesses can work more efficiently and better
serve customers.
IBM has a variety of middleware products with brands like
Websphere, Lotus, Tivoli and Rational that are used to connect
different types of software systems. IBM is a leader in the
middleware business with a nearly 50% market share.
With advancements in its data analysis and information
management software capabilities, as displayed by Watson on
Jeopardy, IBM can further extend its dominance in the middleware
software market against competitors like Oracle and Red Hat.
A pickup in IBM's middleware license revenues as a result of
improved software capabilities going forward could result in
significant upside to IBM's stock value.
We currently estimate that IBM's middleware license revenues
will increase from roughly $5.5 billion in 2010 to $10.3 billion
in 2017. However, if IBM can capture greater market share due to
software advancements, and middleware license revenues accelerate
towards $14 billion (vs. our $10.3 billion base estimate), there
could be over 10% upside to our
$185 price estimate for IBM's stock
.
Drag the trend line in the interactive chart above to see
the affect of various middleware license revenue scenarios on
IBM's stock value.