Once no-brainer stocks, a variety of large tech operators can’t seem to get any traction – look at Cisco (Nasdaq:CSCO) and Microsoft (Nasdaq:MSFT). The belief is that they have gotten too big and cannot find ways to move the needle.
But this is a weak argument. After all, look at IBM (NYSE:IBM). With annual revenue of about $100 billion, the company continues to find ways to move forward. Over the past five years, the average annual growth rate was 16.07%. During the same time, Cisco’s return was -4.75% and Microsoft’s was 0.35%.
Can IBM keep up the momentum? Let’s take a look at the pros and cons:
Pros
M&A prowess. Over the past decade, IBM has struck over 100 acquisitions. A big focus of the strategy has been on software companies — in categories like business intelligence, middleware and analytics. The strategy has not only propelled growth but also increased overall margins (yes, business software can be quite lucrative).
Global infrastructure. If a company has tough information technology needs, IBM certainly has an integrated suite of products. It also has a massive professional services business. It can implement enterprise resource planning software, such as from Oracle (Nasdaq:ORCL) and SAP (NYSE:SAP), develop mobile infrastructures and improve the supply chain.
And, with the trend toward IT outsourcing, IBM is likely to see continued demand.
Emerging markets. As countries like China, Brazil and India expand, they will need to invest in their IT infrastructures. Of course, IBM will be a beneficiary — the company has a long history of understanding how to be successful in foreign markets.
Cons
Threats to its cash cows. IBM has an assortment of high-margin business, which provide consistent revenue streams. Interestingly enough, one of its best continues to be the mainframe segment. But as computing technologies get more sophisticated and cheaper, there may come a time when companies will eventually move away from these large systems.
Complexity. It’s amazing that IBM can effectively manage its far-flung global operations. Yet there are definitely risks. As complexity increases, IBM may ultimately suffer from execution problems. In fact, this was the case for the company during the late 1980s. It almost meant the failure of IBM.
The cloud. Even though IBM has a great software business, there are some vulnerabilities. Keep in mind that much of it is based on traditional approaches (like client-server applications). However, over the past few years, there has been tremendous growth in cloud computing. This involves using centralized, Internet technologies to deliver business applications (the “cloud”). It has been a big driver of companies like Salesforce.com (NYSE:CRM) and NetSuite (NYSE:N). In other words, the challenge for IBM will be to move to the cloud.
Verdict
As the global economy improves, there has been a pickup in IT spending. This was evidenced in IBM’s latest earnings report. Consider that the company posted its highest growth rate in 10 years (when adjusting for currency fluctuations).
A key to success is that IBM has worked hard to develop a compelling vision: the smarter planet. The company believes that — over the long haul — companies will want to have a stronger understanding of their data. Yes, IBM’s software will be critical for this.
The company is doing the right things and the success is likely to continue for some time — the pros outweigh the cons on the stock.
Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli. He does not own a position in any of the stocks named here.
