IBM’s (NYSE:IBM) two most important businesses are middleware software and technology services, in which it competes with firms like Oracle (NASDAQ:ORCL) and Red Hat. Middleware and technology services account for roughly 45% and 24% of the company’s stock value respectively. IBM is also among the global leaders in business systems and competes with hardware vendors like HP (NYSE:HPQ) and Dell (NASDAQ:DELL) in the server market as well as EMC (NYSE:EMC) and NetApp (NASDAQ:NTAP) in the storage market.
9% Downside Scenario: $169 Trefis Price Estimate for IBM
1. IBM Middleware License Revenues: We currently forecast that revenues from the sale of IBM’s middleware licenses will increase from about $5.5 billion in 2010 to over $10 billion by the end of the Trefis forecast period. There could be however be a 5% downside to our $185 price estimate for IBM stock if middleware license revenues increase at the historical rate (which is lower than the growth rate we forecast) reaching close to $8.5 billion by the end of our forecast period.
2. IBM Middleware Software EBTDA Margin: We currently forecast that middleware software EBTDA margin will decrease from about 36% in 2010 to nearly 34% in 2012 and then remain constant through the remainder of our forecast period. There could be 4% downside to our $185 price estimate for IBM stock if margins continue falling, and reach pre-crisis level of 30% by the end of our forecast period.
We have a $185 base price estimate for IBM’s stock, implying a premium to market price.