IBM on a Mission to Save the Planet
IBM stock surged almost from the moment the Smarter Planet campaign began. In early March, shares moved past $200, up from $70 in late 2008, and they continue to trade right at an all-time high. IBM’s market capitalization has risen to about $234 billion. Some analysts, however, are quick to point out that IBM’s bull run relies far more on business basics than the introduction of newfangled technology.
The ads portray an IBM that has transformed itself from a PC maker into an amorphous think tank—so much so that many people struggle to put their finger on what IBM actually sells these days. The company, with annual revenue of $107 billion, still makes tens of billions of dollars a year selling traditional data-center hardware and software. Toni Sacconaghi, an analyst at Sanford C. Bernstein (AB), estimates that about 20 percent of IBM’s revenue and 40 percent of its profits can be traced to hardware, software, services, and financing on mainframes, the grizzled veterans of corporate computing. Such machines are not analytics dynamos but rather workhorses crunching away at the most mundane tasks.
The bulk of the rest of IBM’s business revolves around software and services, in which the company deploys tens of thousands of people to customers’ sites for what can be very lengthy technology installation and consulting engagements. “Most of the technology involved there has been around for 15 or 20 years,” says Vinnie Mirchandani, a technology consultant and author of The New Technology Elite. “IBM is selling stuff customers need, but it’s certainly not innovative.” An IBM spokesman declined to comment.
In recent years, IBM has viewed its old-line hardware businesses as a vehicle for these software and services sales. About 90 percent of IBM’s profits now come from software, services, and financing, which tend to be higher-profit businesses that produce steady sales year in and year out. Through a meticulous, protracted push in this direction, IBM has managed to paint itself as a more sophisticated animal than, say, hardware-heavy HP.
Unlike Apple, IBM’s revenue growth has not surged, and it’s hard to point to any new blockbuster products. Still, IBM has managed its business in a way that produces consistent financial results, and that’s what Wall Street has started to respond to, says Sacconaghi. Investors think of it “less as a technology stock and more like a high-return-of-cash stock,” he says. “I do think things like Watson and Smarter Planet are kind of aspirational things that investors kind of like. But the real resonating factors among investors are the discipline of the financial model and the ability to deliver against it.”
It’s a rare feat for a company as large and as old as IBM to rewrite its image and reignite interest among once cool investors. In its annual report, IBM highlights that its analytics business grew 16 percent, its cloud computing revenue tripled, and its percentage of sales to high-growth emerging markets has doubled over the past decade. All heady stuff. But when it came time for Warren Buffett to explain his 5 percent stake in IBM, he didn’t pat the company on the back for its technological prowess. In his annual letter to Berkshire Hathaway (BRK.A) shareholders, Buffet wrote: “The company has used debt wisely, made value-adding acquisitions almost exclusively for cash and aggressively repurchased its own stock.”