The company is taking a lot of steps to offset this slowdown. These includes acquisitions in the rapidly growing business segment of Analytics and Cloud, which has shown impressive growth. In this article I’ll be discussing some of these steps in detail.
Investments in Cloud, Analytics and Smart Planet will propel future growth
International Business Machines Corp. (NYSE:IBM) has reported impressive revenue growth from its Cloud, Smart Planet and Analytics business segments. Smart Planet revenue increased by 25% in first quarter compared to the first quarter of 2012. Cloud revenue increased by 70% in the same period, while Business Analytics revenue grew by 7%. We believe that these segments will drive future growth.
To consolidate its position in the Cloud segment, the Company recently acquired SoftLayer. This acquisition will help IBM increase its revenue in the storage segment.
Divesting and rebalancing resources will help improve margins
International Business Machines Corp. (NYSE:IBM) in its vision program has stated that it will focus on businesses with high margins and spin off operations with low margins. The company has been divesting its businesses that have low margins. This has impacted the revenue in the short term, but the company has been able to increase its margin.
We believe the divestment and the resource allocation will help the company concentrate on its high margin business and will bring in more operational efficiency.
US immigration bill will help IBM increase margin
The US immigration bill, if passed in its current form, will have a positive impact on the US based IT companies, and will hit the India based ones. With already shrinking margin in the ADM business, this will further pressure the margins of Indian IT bigwigs.
It will also give the US based companies an opportunity to improve upon their margins, as their H1-B holder employees are much fewer in number than the specified percentage in the bill. So this will help International Business Machines Corp. (NYSE:IBM) issue more H1-B visas without incurring extra cost.
Peer analysis
Hewlett-Packard Company (NYSE:HPQ) and Oracle Corporation (NASDAQ:ORCL) are two major competitors of IBM. We will analyze both of them.
Hewlett-Packard Company (NYSE:HPQ) has undergone frequent changes in its leadership in the last few years. With a stable leadership in place now, the company can focus on improving its business performance.
HP’s revenue fell sharply in the last quarter, ended in April, compared to 2012. The major reason for this drag is the approximate 20% fall in the demand for personal systems, which contribute 25% to its revenue. The sales in the personal computer segment are expected to shrink further, so we don’t see any improvement in this section for HP.
The company has lagged behind its peers in developing cloud computing and tablets. HP has realized this mistake, and has invested heavily to develop technology for data analysis. Recently the company unveiled its HAVEn software for its data analysis unit.
The company has also taken steps to reduce costs and to improve operational efficiency. The company has planned to cut 27,000 jobs by October. This will result in $1.2 billion of cost savings. We believe that the investment in emerging technology like cloud, analytics and mobility will help increase its revenue and margin in the coming quarter. At the current price we believe that the stock is worth buying.
Oracle Corporation (NASDAQ:ORCL)’s fourth quarter fiscal year 2013 sales were below the consensus estimate. The company reported revenue of $10.95 billion against the consensus estimate of $11.12 billion. There was a small increase of 1% and 6% in revenue from new licenses and renewal of licenses, but the hardware products and support fell by 13% and 3% year-over-year from fourth quarter 2012.
The revenue from the service business has also dropped by 9% year-over-year. However, the company showed a remarkable 45% growth in Exadata, Exalogic, Exalytics, SPARC SuperCluster and 50% growth in cloud.
In the coming quarter the cloud and analytics will help the company increase its revenue and margin, whereas its software license and renewal of license will improve as the macroeconomic condition is showing signs of improvement. At the current price, the stock looks worthwhile to have in the portfolio.
Conclusion
International Business Machines Corp. (NYSE:IBM)’s initiative in developing technological expertise in emerging technology has helped mitigate the revenue slump in its business units. The current initiative by the company to divest the low margin business and the resource reallocation exercise will have short term impact on revenue. We believe that the company’s focus on high margin business will drive the future growth and help it achieve its EPS target of $20 by 2015. We are bullish on this stock.
The article Buying and Selling at This IT Giant originally appeared on Fool.com and is written by Lalit Kumar.
Lalit Kumar has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines Corp. (NYSE:IBM). and Oracle. Lalit is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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