The Impact of Increased Tech Spending on IBM


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.

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: DELL , EMC , HPQ , IBM , ORCL



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