) derives the bulk of its revenues from server sales (including
system z, system x and system p servers) for which IBM is the
global market leader. Competitors include other technology giants
like HP (
), Dell (
) and Oracle (
) in the server market.
In its most recent Q1'11 earnings, IBM exceeded expectations,
posting strong revenue growth in its hardware business segment.
However, this improvement has little significance to IBM's stock
value, given the small contribution of the hardware segment to the
company's overall value.
We currently have a
$185 price estimate for IBM
, about 10% ahead of market price, and estimate that the hardware
business represents only 2% of IBM's equity value.
Low EBTDA Margin on Hardware Business
The hardware business typically has lower margins compared to
software or services businesses. While hardware sales made up 18%
of IBM's revenues in 2010, the segment's contribution to firm's
EBTDA was only 9.8%.
Server business EBTDA margin of roughly 13% in 2010 was much
lower than that of IBM's software, services or financing
businesses. While we currently forecast that server EBTDA margin
will hover around 13% going forward, the potential upside from this
segment is limited given its relatively small contribution to the
company's value. An increase in server EBTDA margin to 15%, for
example, would only imply $2 of upside to our
$185 price estimate for IBM's stock
Despite the low contribution to IBM's stock value, the server
business does hold importance and significant intangible value for
IBM, as a number of software solutions and services provided by the
firm are based on its installed server base.
See our full analysis of IBM stock here