IBM (
IBM
) sells middleware software and technology services such as
outsourcing and integration to large and medium sized businesses
worldwide, and competes with firms like Oracle (
ORCL
) and Red Hat. 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 storage firms like EMC (
EMC
) and NetApp (NTAP) in the storage market.
We previously discussed the potential upside to IBM from
improving margins (see our article
Higher Margin on Software and Systems Reinforces
Promising Outlook for IBM
). Here we take a look at a new source of upside - the trend of
increased tech spending by large corporations. Increased tech
spending during Q4 2010, after corporations delayed technology
purchases and upgrades during the downturn, have stimulated rising
profits for tech suppliers like IBM, EMC and SAP.
We currently have a
$185 Trefis price estimate for IBM's stock
, about 15% above market price. We estimate that middleware
software is IBM's largest business segment, accounting for nearly
46% of the company's equity value followed by technology services,
which constitute an estimated 28% of IBM's stock value.
Enterprise Tech Spending On the Rise in 2011
An analyst at ISI Group recently noted that companies witnessing
growth of sales and margins in an improved economic environment are
more willing to spend money on technology. He also pointed out that
tech spending typically lags corporate profits by three quarters,
indicating potential revenue growth on the horizon for firms like
IBM.
During Q4 2010, IBM's global technology services segment
recorded its first increase in revenue from existing accounts since
late 2008, as corporate profits grew with improvement in the
economic environment.
See our full analysis and $185 price estimate for
IBM
Potential impact on IBM
We currently project a 12% increase in IBM's middleware license
revenues for 2011, followed by steady growth throughout our
forecast period. Drag the trend line in the interactive chart above
to see the affect of various middleware license revenue scenarios
on IBM's stock value.