IBM Shares — 3 Pros, 3 Cons

Big Blue continues to prove agile as the tech market evolves

Just last week, IBM’s (NYSE:IBM) shares hit an all-time high of $190.53, giving the company a $222 billion market capitalization and making it the No. 2 most valuable tech operator in the world.

But as of this week, investors have become a bit more concerned. While IBM’s latest earnings report definitely was strong — with earnings up 13%, to $3.19 per share — it still wasn’t enough to keep up with Wall Street’s expectations. The main reason was IBM’s revenues, which came to $26.2 billion against the consensus estimate of $26.3 billion. On the news, IBM’s shares fell 4.73% to $177.76.

So might IBM be suffering from the slowdown in the economy, or can the company push forward and continue to grow? To see, here’s a look at the pros and cons:

Pros

Great management. Even though IBM is 100 years old, the company still has an innovative culture. The management team also knows the importance of execution. For example, back in 2005, IBM sold off its PC division to Lenovo, which allowed the company more flexibility to focus on better growth areas.

IBM’s acquisition approach also is fairly disciplined, usually focusing on smaller deals. This certainly is contrary to the behavior of many other tech companies, including Hewlett-Packard (NYSE:HPQ) and Microsoft (NASDAQ:MSFT), which have been aggressive with large acquisitions. Generating positive results from such deals, however, can be extremely difficult.

Megatrends. During the past decade, there have been most some huge developments in technology, including the emergence of cloud computing, big data and mobile. Yet these require global infrastructures of datacenters, servers and high-end software. The good news is that IBM is one of the few companies that can provide all of this at scale.

Growth markets. For decades, IBM has been investing in emerging-market economies. No doubt, they need top-notch technologies to continue their growth.

Cons

Disruption. It’s hard to imagine that mainframes still are a big part of the world’s computer infrastructure. After all, there are now many cheaper alternatives. But large customers still see the need to keep their old technology. And yes, IBM continues to benefit. But at what point will customers begin to move away from mainframes? It’s tough to tell, but it is something that could happen within the decade or so.

Competition. IBM has staunch rivals such as Oracle (NASDAQ:ORCL), SAP (NYSE:SAP), Microsoft and HP. But the company also must fend off many earlier-stage companies that are using next-generation technologies. Some of these include NetSuite (NYSE:N) and Salesforce.com (NYSE:CRM).

Macroeconomy. In its latest earnings report, IBM did provide some evidence that the world economy is pressuring the results. This especially is the case in Europe, which is dealing with its sovereign debt crisis. Unfortunately, there are now signs that Asia is facing problems as well, which could make it even tougher for IBM to maintain its revenue growth.

Verdict

IBM understands the importance of setting big strategic goals. To this end, the company has a roadmap to reach $20 billion in revenue growth by 2015. How? IBM will continue to focus on acquisitions, which likely will come to about $20 billion. For the most part, the deals will be focused on software. If it all works out, IBM plans to generate $100 billion in free cash flows and will return 70% of it to shareholders.

This is the kind of strategy that should keep the stock moving upward — at least for the long haul. In other words, the pros outweigh the cons on the stock.

Tom Taulli runs the InvestorPlace blog “IPOPlaybook,” a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “All About Short Selling” and“All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a positioning any of the stocks named here.


Article printed from InvestorPlace Media, http://investorplace.com/2011/10/ibm-shares-3-pros-3-cons-tech-stocks/.

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