IBM’s Middleware Dominance Will Help it Serve the Cloud

IBM has a variety of middleware products with brands like Websphere, Lotus, Tivoli and Rational that are used to connect different types of software systems. IBM is a leader in the middleware business with nearly 50% share. The company’s large middleware client base and the “sticky” nature of many middleware clients makes it harder for Oracle and Red Hat to win share quickly. We wrote about IBM’s middleware business earlier this year and said the key drivers to this business is the revenue from the new license sales. (See Middleware Software Constitutes 41% of IBM’s Stock)

We currently have a $177 Trefis price estimate for IBM’s stock, about 20% above its market price, with the Middleware Software constituting 46% of it.

Will Middleware Help IBM Conquer the Cloud?

Cloud computing is increasingly being adopted as a way for IT organizations to decrease costs, improve efficiency and enhance business agility. It is a flexible, cost-effective and proven delivery platform for providing business or consumer IT services over the Internet. Cloud resources can be rapidly deployed and easily scaled, with all processes, applications and services provisioned “on demand,” regardless of user location or device. As a result, cloud computing gives organizations the opportunity to increase their service delivery efficiencies, streamline IT management and better align IT services with dynamic business requirements. ^[1]

IT budgets in most organizations have historically remained stubbornly flat, but demands on IT continue to rise year over year. Increasing requirements for business agility, reducing costs, and improving efficiencies has forced organizations to implement private clouds. Cloud computing enables IT departments to overcome the short comings of traditional environments – built and optimized to run specific applications, delivering poor server and storage utilization. ^[2]

Technology companies spent around $100 billion in acquisitions last year and are likely to spend more in 2011 on demand for cloud computing and security services, according to Bloomberg. Intel Corp., HP and IBM purchases 2,700 companies using cash they had built up during the downturn. ^[3] This spending power and scale gives these large organizations an advantage as they take on the cloud.

However, the concerns about security and reliability have been slowing down the adoption of the cloud. Although the benefits of cloud computing are clear, so is the need to develop proper security for cloud implementations. It is precisely here that IBM’s extension of its middleware solution for cloud combined with its leadership position in the middleware market could help allay these concerns and help IBM secure prominence in the cloud as well. ^{[4] [1]}

Potential Upside for IBM’s Stock

The extension of IBM’s middleware for cloud combined with IBM’s leadership in the middleware market (nearly 50% market share) will provide an indispensable proposition to customers looking to shift to a cloud infrastructure. We estimate there could be upside of 7% to $177 Trefis price estimate for IBM’s stock if IBM’s middleware license revenues increased at a faster rate going forward boosted by the cloud integration, reaching $14 billion up $3.5 billion from our current forecast.

Our complete analysis of IBM’s stock is here.