IBM - International Business Machines

[compoundinglife]

 

One area I'd watch is to see if IBM starts to move into the PaaS space.  They would be a great fit there. 

 

 

They have Bluemix which is their PaaS offering. They support a bunch of different language runtimes, database backends, message queues etc.... I have not tried it out but they are offering it.

[txlaw]

Interestingly, IBM and MSFT are now collaborating to make their enterprise software available on each others' PaaS platforms.

 

https://www-03.ibm.com/press/us/en/pressrelease/45196.wss

http://www.informationweek.com/cloud/platform-as-a-service/ibm-microsoft-cloud-partnership-examined/d/d-id/1316891

 

Apparently, some people do want IBM's "run your business" software offerings?  Cringely is very anti-IBM and tends to be pretty hyperbolic, though he is right about morale problems there.  I've met some IBM-ers who really do get frustrated that they can't do their best work.

 

One interesting to note about Bluemix: currently, the Watson APIs are only available on Bluemix.  It will be interesting to see if IBM can successfully market Watson and whether or not it will drive Bluemix usage.

[Palantir]

By "cooperating" you mean, they are actively trying to screw each other by commoditizing the other's application. The winner will be whoever's PaaS wins (IMO).

[txlaw]

By "cooperating" you mean, they are actively trying to screw each other by commoditizing the other's application. The winner will be whoever's PaaS wins (IMO).

 

Uhh, no.  That would be a stupid strategy.

[KCLarkin]

I was not looking at Google as a competitor in the enterprise CRM space. WRT to Google I see compute engine and friends as a direct competitor to Softlayer for infrastructure as service. If I were interested in IAAS today I would go look at AWS, Google compute engine and Azure. Probably in tht order. Softlayer's schtick is offering more transparency into the cloud and real hardware if you need it for your work loads which I think will attract some enterprise customers that are not willing to deal with the more utility like model that AWS and Google have and are willing to pay more $. I guess I would not rule google out as a large competitor with them in that space.

 

IAAS is a tiny fraction of IBMs revenue. Public IAAS is even smaller. IBM will mainly focus on private and hybrid clouds. Think huge enterprises with very complex systems supporting multiple legacy applications. I would guess the IAAS spectrum will look like this (skipping many vendors to keep things simple):

 

Google - AWS - MSFT - IBM

 

Small -> Enterprise

Simple -> Complex

Public - > Hybrid

 

The main threats from Google and even AWS are indirect (margin compression, etc). MSFT is possibly a more direct competitor.

 

The CIA contract with AWS clouds the picture somewhat. Strategically, this doesn't seem to make sense but it seems like AWS really wants to run the table. If they do, this will be an enormous accomplishment.

 

But my main point is that IBMs main competition is still the IT dinos: Accenture, Cisco, Oracle, HP...

[KCLarkin]

By "cooperating" you mean, they are actively trying to screw each other by commoditizing the other's application. The winner will be whoever's PaaS wins (IMO).

 

Uhh, no.  That would be a stupid strategy.

 

I think this misstates IBM's strategy. IBM's goal is to be vendor agnostic. They want to play the role of tying all of these complex systems together. That's why they aren't in the applications business. That's why they are the major supporter of LINUX. That's why they launched OpenPOWER. Their role is to help large enterprises navigate and manage technical complexity.

[jay21]

Prem taking a substantial position: http://www.dataroma.com/m/holdings.php?m=FFH

[dwy000]

Interesting that he took the position prior to the drubbing of the stock post 3Q results. 

 

With both Prem and Buffet taking such substantial positions (and even adding to them) plus the price drop since 3Q, it's getting tougher and tougher to sit on the sidelines.

[Grenville]

I'm surprised FFH has built a ~200mln position in IBM...

[TwoCitiesCapital]

Interesting that he took the position prior to the drubbing of the stock post 3Q results. 

 

With both Prem and Buffet taking such substantial positions (and even adding to them) plus the price drop since 3Q, it's getting tougher and tougher to sit on the sidelines.

 

Agreed here, but neither Prem nor WEB seem to have had much luck/experience in the way of tech investments in the past. Still trying to wrap my head around the thesis because I don't  want to be the weak hand if it keeps dropping.

[kevin4u2]

Ya, they are both a little slow.  I just purchased more. 

 

Interesting that he took the position prior to the drubbing of the stock post 3Q results. 

 

With both Prem and Buffet taking such substantial positions (and even adding to them) plus the price drop since 3Q, it's getting tougher and tougher to sit on the sidelines.

 

Agreed here, but neither Prem nor WEB seem to have had much luck/experience in the way of tech investments in the past. Still trying to wrap my head around the thesis because I don't  want to be the weak hand if it keeps dropping.

[TwoCitiesCapital]

Ya, they are both a little slow.  I just purchased more. 

 

Interesting that he took the position prior to the drubbing of the stock post 3Q results. 

 

With both Prem and Buffet taking such substantial positions (and even adding to them) plus the price drop since 3Q, it's getting tougher and tougher to sit on the sidelines.

 

Agreed here, but neither Prem nor WEB seem to have had much luck/experience in the way of tech investments in the past. Still trying to wrap my head around the thesis because I don't  want to be the weak hand if it keeps dropping.

 

I certainly  wasn't  suggesting that. WEB has long stayed away from tech investments for his own reasons and has generally acknowledged that most of them are out of his circle of competence.  Whether IBM is, or isnt, remains to be seen.  Prem was very wrong on BlackBerry  at nearly every price up until the last two years.

 

Both are brilliant investors  but by their own admissions, and prior experience, tech has been tough for them. Not saying this won't  be a successful investment  but but there is certainly enough evidence to suggest investors  shouldn't  simply  follow them into this without having their own thesis.

[Viking]

Prem looked to be very involved in RIMM given the issues the company was having. My guess is he has learned a great deal about the tech industry the past 2 years so I am not concerned about his track record in tech when looking at IBM. The size of the IBM purchase suggests to me that they are in for the long haul; given the drop in the share price post purchase I would expect them to make another large purchase. IBM looks like a solid 8-10% gainer from here; a good replacement for bonds in a portfolio (for me anyways).

[KCLarkin]

Interesting that Allan Mecham managed to dump his 6% position of IBM before the freefall in October.

[100 Shares]

Interesting that Allan Mecham managed to dump his 6% position of IBM before the freefall in October.

 

He sold nearly 36% of his portfolio during that quarter. I'd wager it was luck...

[LowIQinvestor]

I think this misstates IBM's strategy. IBM's goal is to be vendor agnostic. They want to play the role of tying all of these complex systems together. That's why they aren't in the applications business. That's why they are the major supporter of LINUX. That's why they launched OpenPOWER. Their role is to help large enterprises navigate and manage technical complexity.

 

I think this is an intelligent way of thinking about the long term opportunity for IBM. Long runway ahead for growth of data, complex systems integration, analytics etc.

 

I guess the bear case is that IBM's brand is diminishing as the "go-to" solutions provider for large IT depts.

 

I still don't understand why Accenture deserves such a higher multiple compared to IBM. I know ACN's revenues are increasing but the contrast in valuations is quite interesting. IBM's profit margins are still significantly higher than ACN's.

 

http://financials.morningstar.com/valuation/price-ratio.html?t=ACN

vs

http://financials.morningstar.com/valuation/price-ratio.html?t=IBM

 

[T-bone1]

I think this misstates IBM's strategy. IBM's goal is to be vendor agnostic. They want to play the role of tying all of these complex systems together. That's why they aren't in the applications business. That's why they are the major supporter of LINUX. That's why they launched OpenPOWER. Their role is to help large enterprises navigate and manage technical complexity.

 

I think this is an intelligent way of thinking about the long term opportunity for IBM. Long runway ahead for growth of data, complex systems integration, analytics etc.

 

I guess the bear case is that IBM's brand is diminishing as the "go-to" solutions provider for large IT depts.

 

I still don't understand why Accenture deserves such a higher multiple compared to IBM. I know ACN's revenues are increasing but the contrast in valuations is quite interesting. IBM's profit margins are still significantly higher than ACN's.

 

http://financials.morningstar.com/valuation/price-ratio.html?t=ACN

vs

http://financials.morningstar.com/valuation/price-ratio.html?t=IBM

 

If you are comparing two companies based on a multiple of earnings, would higher profit margins at one company really justify a higher price to earnings ratio?

 

If both companies are in the same business, shouldn't the company with higher margins trade at a discount on a P/E basis because profit margins should normalize?

 

To take an extreme example: If one business sells $1,000,000 worth of widgets at a 1% net margin ($10,000 profit) and another company selling $1,000,000 of the same widgets is able to get a 10% net margin ($100,000 profit), would it ever make sense to value the higher-margin company at a premium earnings multiple? 

 

Wouldn't the lower margin company be able to copy whatever the better competitor is doing, so that margins converge at least slightly (i.e. the lower-margin company might be able to easily double earnings, while the higher-margin company might see a slight contraction).

[LowIQinvestor]

Quote from: LowIQinvestor on Today at 08:10:30 AM

Quote

I think this misstates IBM's strategy. IBM's goal is to be vendor agnostic. They want to play the role of tying all of these complex systems together. That's why they aren't in the applications business. That's why they are the major supporter of LINUX. That's why they launched OpenPOWER. Their role is to help large enterprises navigate and manage technical complexity.

 

I think this is an intelligent way of thinking about the long term opportunity for IBM. Long runway ahead for growth of data, complex systems integration, analytics etc.

 

I guess the bear case is that IBM's brand is diminishing as the "go-to" solutions provider for large IT depts.

 

I still don't understand why Accenture deserves such a higher multiple compared to IBM. I know ACN's revenues are increasing but the contrast in valuations is quite interesting. IBM's profit margins are still significantly higher than ACN's.

 

http://financials.morningstar.com/valuation/price-ratio.html?t=ACN

vs

http://financials.morningstar.com/valuation/price-ratio.html?t=IBM

 

If you are comparing two companies based on a multiple of earnings, would higher profit margins at one company really justify a higher price to earnings ratio?

 

If both companies are in the same business, shouldn't the company with higher margins trade at a discount on a P/E basis because profit margins should normalize?

 

To take an extreme example: If one business sells $1,000,000 worth of widgets at a 1% net margin ($10,000 profit) and another company selling $1,000,000 of the same widgets is able to get a 10% net margin ($100,000 profit), would it ever make sense to value the higher-margin company at a premium earnings multiple? 

 

Wouldn't the lower margin company be able to copy whatever the better competitor is doing, so that margins converge at least slightly (i.e. the lower-margin company might be able to easily double earnings, while the higher-margin company might see a slight contraction).

 

I understand your line of thinking. You view IBM's products and services as a commodity? The customer is solely looking at price?

 

Thought you might enjoy this article:

"Death Of The (IBM) Salesman"

http://www.forbes.com/sites/robertcringely/2014/11/19/death-of-the-ibm-salesman/?partner=yahootix

[Palantir]

I don't follow, what do margins have to do with the earnings multiple?

[KCLarkin]

If you are comparing two companies based on a multiple of earnings, would higher profit margins at one company really justify a higher price to earnings ratio?

 

If both companies are in the same business, shouldn't the company with higher margins trade at a discount on a P/E basis because profit margins should normalize?

 

Profit margins may hint at a durable competitive advantage. Either company A has pricing power or company A has a cost advantage. The research I have seen is that good businesses tend to stay good businesses and bad businesses stay bad businesses (at least measured by ROE/ROC). But I think IBM and ACN are both very good businesses. I believe this concept of "normalizing" profit margins or "perfect competition" are often a trap for value investors.

 

Somewhat related, Novy-Marx has shown that GP/A is strong predictor of future returns:

http://rnm.simon.rochester.edu/research/OSoV.pdf

 

[LowIQinvestor]

Profit margins may hint at a durable competitive advantage. Either company A has pricing power or company A has a cost advantage. The research I have seen is that good businesses tend to stay good businesses and bad businesses stay bad businesses (at least measured by ROE/ROC). But I think IBM and ACN are both very good businesses. I believe this concept of "normalizing" profit margins or "perfect competition" are often a trap for value investors.

 

Well Said! Agree.

 

[VAL9000]

IBM and ACN are not in the same business, which is why their multiples don't compare.  Assuming the IBM services business, which is about 2x the size of the ACN services business, runs at around the same level of efficiency, then you can assume they both have pre-tax margins of about 14%.

 

This means that IBM's other businesses run at a combined pre-tax margin of about 25%.  Those other businesses are software and hardware.  Software probably dominates that margin contribution, but since the hardware stuff is mainly proprietary it could be pretty good too.

 

Also to correct an error in someone's post earlier - IBM is very much in the application business.  More than half of the brands generating software revenues cover applications.  Plus look at the acquisition list: http://en.wikipedia.org/wiki/List_of_mergers_and_acquisitions_by_IBM  About half of those companies acquired in the past 5 years are applications targeted to support enterprise users.  And of those, about half of them relate to the analysis of very large sets of data.

 

[KCLarkin]

IBM and ACN are not in the same business, which is why their multiples don't compare.  Assuming the IBM services business, which is about 2x the size of the ACN services business, runs at around the same level of efficiency, then you can assume they both have pre-tax margins of about 14%.

 

I don't think this is a safe assumption:

- IBM has a mix of low margin (commodity) and high margin services (differentiated)

- IBM is likely less efficient (not that familiar with ACN but IBM is lagging industry in global delivery and automation). This was called out as an opportunity to increase margins by IBM CFO recently

- AFAIK, IBM typically charges more than ACN presumably because of a higher mix of differentiated services

 

So, it is possible that these net out to the same margins but unlikely.

 

Also to correct an error in someone's post earlier - IBM is very much in the application business.  More than half of the brands generating software revenues cover applications.  Plus look at the acquisition list: http://en.wikipedia.org/wiki/List_of_mergers_and_acquisitions_by_IBM  About half of those companies acquired in the past 5 years are applications targeted to support enterprise users.  And of those, about half of them relate to the analysis of very large sets of data.

 

That was probably me. I don't count security or analytics as applications, though this is probably semantics. IBM does sell applications (e.g. Notes) so this was a generalization. 92% of IBMs software revenue is middleware and OS though. So applications are a tiny part of IBMs business.

[VAL9000]

IBM and ACN are not in the same business, which is why their multiples don't compare.  Assuming the IBM services business, which is about 2x the size of the ACN services business, runs at around the same level of efficiency, then you can assume they both have pre-tax margins of about 14%.

 

I don't think this is a safe assumption:

- IBM has a mix of low margin (commodity) and high margin services (differentiated)

- IBM is likely less efficient (not that familiar with ACN but IBM is lagging industry in global delivery and automation). This was called out as an opportunity to increase margins by IBM CFO recently

- AFAIK, IBM typically charges more than ACN presumably because of a higher mix of differentiated services

 

So, it is possible that these net out to the same margins but unlikely.

 

It's a pretty safe assumption that software margins run higher than service margins.  IBM has a sizable software business, so that's why their margins are higher than ACN's.  I'm explaining why it is a bad idea to compare ACN to IBM.  There seems to be considerable resistance to the idea that IBM is more than a services business.

 

Also to correct an error in someone's post earlier - IBM is very much in the application business.  More than half of the brands generating software revenues cover applications.  Plus look at the acquisition list: http://en.wikipedia.org/wiki/List_of_mergers_and_acquisitions_by_IBM  About half of those companies acquired in the past 5 years are applications targeted to support enterprise users.  And of those, about half of them relate to the analysis of very large sets of data.

 

That was probably me. I don't count security or analytics as applications, though this is probably semantics. IBM does sell applications (e.g. Notes) so this was a generalization. 92% of IBMs software revenue is middleware and OS though. So applications are a tiny part of IBMs business.

Ok we can agree that it could be semantics.  I count applications as software that is business user facing - the kind of stuff that does transition well to a cloud-based environment.

[KCLarkin]

I'm explaining why it is a bad idea to compare ACN to IBM.  There seems to be considerable resistance to the idea that IBM is more than a services business.

 

I agree with you. I'm just saying that even if they split off the services business, IBM Services and ACN margins aren't directly comparable even though they are direct competitors in many cases.

 

IBM is forecasting that more than 20% of their revenue will be from analytics and big data next year.