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International Business Machines Corp. (IBM)’s Long-Term Potential

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has been rewarding shareholders over the years with its stable growth coupled with robust buy back and healthy dividend programs. It has returned over $150 billion to shareholders since the year 2000. But the company’s recent quarter earnings disappointed analysts and raised a few eyebrows regarding the company’s future. Is this event a red signal for long term investors, or will it be just a minor speed-bump in an otherwise long and successful journey? With a time horizon of over 5 years let’s see if International Business Machines Corp. (NYSE:IBM) makes a sensible buy.

International Business Machines Corp. (NYSE:IBM)

The main reasons for the earnings miss were exchange rate issues because of the weaker yen, a slowing down of the hardware business, and a slowing European economy. The currency problem will take some time to solve, but it does not show a weakness in International Business Machines Corp. (NYSE:IBM); it’s a problem that many companies are facing.

The European downturn shouldn’t last forever, and so with a time view of over 5 years International Business Machines Corp. (NYSE:IBM) shareholders might come out as winners in the end.

And finally, the company is shifting from its slowing hardware business to other high-margin, fast growing businesses, which will improve revenues and profits in the coming years.

International Business Machines Corp. (NYSE:IBM) has smartly reduced its hardware business to just 17% of the overall revenue compared to over 50% in the early 90’s. It is focusing more on the Global Technology Services Segment and the Software segment, which now account for over 81% of the company’s revenues. The services and software segments are high margin businesses, and as International Business Machines Corp. (NYSE:IBM) gains a strong foothold in this segment its margins might improve further and reward patient shareholders. According to Zacks, gross margin is expected to increase by 70 and 50 bps on a year over year basis to 49.4% and 49.9% in FY13 and FY14, respectively.

Businesses use data analytics to analyze massive amounts of information in order to predict patterns or changes in customer behavior. Data analytics service businesses are booming today, and IDC estimates some $2.5 billion is being channeled into big data start-ups. Experts estimate big data analytics is going to be a huge industry in the coming 5 years, and thus investors should start to look for value buys in the industry. International Business Machines Corp. (NYSE:IBM) is intelligently tapping this market. It has acquired 54 data analysis companies since 2005 and forecasts that by 2015 this segment will generate more than $20 billion in revenues. The company is also spending $100 million on research and development in the sector.

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