Why IBM is as cheap as chips

IBM is quietly going about the business of building an indispensable suite of cloud applications. Meanwhile, the stock consistently rewards shareholders.

By TheStreet Staff Feb 4, 2013 3:48PM

File photo of the IBM logo (© ODD ANDERSEN/AFP/Getty Images)By Dana Blackenhorn, TheStreetthestreet logo


Over the last five years, owning shares of IBM (IBM) has been very, very good for investors.


Since November 2008 the stock has more than doubled in value; the dividend, which has been raised at regular intervals, now stands at 85 cents per share, yielding 1.7%. IBM can well afford the $1 billion quarterly payout -- profits range from $3 billion to $5 billion each quarter.


Despite this, all is not well at Big Blue, at least according to analysts.


A quick calculation shows IBM's market cap is only 2.21 times its annual sales. The figure for Apple (AAPL) is 2.73, for Microsoft (MSFT) 3.12 and for Google (GOOG) 4.95. The only large tech company doing worse by this measure is Intel (INTC), at 1.96.


IBM is literally as cheap as chips.

The leader in the cloud 

Why? Stagnation on the top line is usually blamed. IBM sales today are no higher than in 2008. Its gains are explained entirely by rigid cost-cutting, which has slowly boosted profit margins and has gotten operating margins to near 25%, close to those of Apple and Google.


Moreover, IBM makes few waves. Check the news headlines around the company and you will find very little that's interesting. It's all new customers, new research results, new capabilities and new donations of gear. Services chief Michael Daniels recently sold a little more than 10,000 shares, but he was in the process of retiring. On Wall Street $2 million is just a gold watch.


IBM has a road map with $20 billion in acquisitions due by the end of 2015. Most of the deals have been relatively modest, highlighted by last year's $1.3 billion outlay for Kenexa,  a "talent acquisition" outfit.


Analysts are pushing for the company to make a run at NetApp (NTAP), Bloomberg reported, but the cloud-storage company seems to be outside IBM's price range, at $12.9 billion. It's also a hardware company.


A more typical IBM buy is Butterfly Software, a data-migration and analysis company out of England, which was quietly acquired in September.

IBM has been referred to as a "creaky old business"  by digital news outlet Quartz, which missed the point with its complaint that most of IBM's "big" software deals are in the past. What IBM is trying to build is a suite of "big data" and cloud applications, using software that makes its own cloud services worth a premium price and make it an obvious choice for private clouds.


If you really want to know who the cloud leader is, in fact, it's not Red Hat (RHT) or Rackspace (RAX) or even Google. It's IBM.


The only choice in the field 

No company has built as many cloud systems, no company brings in more revenue from cloud, and no company is as focused on enterprise cloud computing as IBM. Just as IBM spent the 1990s and 2000s quietly unifying its operating system strategy under Linux, it has spent most of this decade building a complete cloud stack -- infrastructure, platforms, software applications and services that, for most big enterprises, make it the only choice in the field.


The last is key. At the end of the day, what companies want from cloud isn't the infrastructure or the "big data," but applications for and solutions to their most intractable problems. That's what IBM's software acquisition strategy is about, having those solutions ready before big customers even ask for them.


Silicon Valley is a loud and raucous place, it's capitalism that is red in tooth and claw, and so we assume that is what technology is supposed to be about. But it doesn't have to be that way.


IBM is quietly selling at a market-average 14 times earnings, with steadily rising dividends, rising profits and operating margins, plus a clear idea of how it will get to the cloud market before anyone else.


It really is as cheap as chips.


At the time of publication the author had positions in IBM, Microsoft, Google, Intel, Red Hat and Apple.


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