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Investment Overview for IBM (NYSE:IBM)
Below are key drivers of IBM's value that present opportunities for upside or downside to the current Trefis price estimate for IBM:
Cognitive Solutions Software
- IBM Cognitive solutions software License Revenues: We currently forecast the revenues from the sale of IBM's cognitive solutions software licenses to increase marginally to $3.90 billion by the end of the Trefis forecast period in 2023. While we expect demand to pick up on the back of increase in software development around the globe, especially from legacy code conversion to newer standards and capabilities, IBM might not be able to capitalize on it as it is looking to roll back perpetual licensing in light of emerging cloud SaaS and focus on the subscription model. However, if demand were to decline, due to the overall downturn in the economy, there could be a 5% downside to the Trefis price estimate if middleware license revenues were to decline to $4 billion by the end of Trefis forecast period.
- IBM'e Renewal rate for software: We currently forecast the revenues from the sale of IBM's renewal rate to stabilize at 94%. The company is focusing on Software as a service (SaaS) solutions that encompass cognitive solutions software. As the company rolls out its cloud based subscription SaaS model, recurring license revenue is expected to increase. However, if demand were to decline, due to overall downturn in economy, there could be a 5% downside to the Trefis price estimate if renewal rate for license were to decline to 85% by the end of Trefis forecast period.
- IBM Cognitive Solutions Software EBITDA Margin: We currently forecast middleware software EBITDA margin to decrease from about 35% in 2016 to 32% by the end of 2023. There could be 12% upside to the Trefis price estimate if margin were to improve to 40% due to IBM's brand recognition. On the other hand, there could be 10% downside to the Trefis price estimate if the margin were to fall due to lower economic demand, reaching a level of 25% by the end of the Trefis forecast period.
Technology & Cloud Services
- Infrastructure & Cloud Services EBITDA Margin: Thes margins have witnessed good growth in 2016. The margins have improved from 22% in 2012 to 25.2% in 2016. While we currently forecast the EBITDA margin to stabilize at 25.5% in the future as demand for infrastructure and cloud improves and the company restructures its low margin contracts for higher margins in an industry that is highly competitive. Nevertheless, a decline in the future to recession level of 15% could result in a significant downside of 5% to the Trefis price estimate.
- IS Signings: According to our estimates, Infrastructure signings grew to $26 billion in 2016 as the company reported combined revenues for Infrastructure and Outsourcing services. We currently forecast IBM's signings to decrease to $25.7 billion by the end of our forecast period, primarily due to the sale of outsourcing business in 2013 and move to cloud-based services. However, there could be a 10% downside to the Trefis price estimate if the signings were to decrease to $15 billion due to lower demand for theses services as a result of price war from other vendors like Accenture, Cognizant and Infosys. On the other hand, if infrastructure and cloud-based services gain traction and signings grew to $30 billion, there is 10% upside to the stock price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for IBM at the top of the page.
IBM makes money primarily through the sale of Cognitive Solutions Software and Technology Services such as outsourcingInfrasctrucutre & Cloud Services and Outsourcing. IBM's customers are large and medium-sized businesses worldwide.
Cognitive solutions software provides the basis for many of the company’s strategic areas including analytics, security and social. IBM has established the world’s deepest portfolio of data and analytics solutions, including analytics and data management platforms, cloud data services, enterprise social software, talent management solutions, and solutions tailored by industry. Watson Platform, Watson Health and Watson Internet of Things capabilities are included in Solutions Software. IBM’s world-class security platform delivers integrated security intelligence across clients’ entire operations, including their cloud, applications, networks and data, helping them to prevent, detect and remediate potential threats.
Infrastructure and cloud Services, offered under the Technology and cloud services (TCS) umbrella, are IBM’s offerings that support a company’s IT infrastructure with the use of IBM software and cloud resources. The portfolio includes a comprehensive set of hybrid cloud services and solutions to assist clients in building and running enterprise IT environments that utilize public and private clouds and traditional IT.
Many companies such as Alphabet, Microsoft, Accenture, Amazon are dabbling in the Cognitive solutions field. However, IBM has first movers advantage. In the Infrastructure and Cloud Services, Amazon and Microsoft lead. But other providers such as Adobe also have a strong foothold in niche segments.
Cognitive Solutions Software
We believe that is the most valuable segment within IBM due to:
High Renewal Rate
IBM has first movers advantage for offering AI-based Cognitive solutions to SME through cloud. The advent of cloud-based services has resulted in a shift in revenue from maintenance to license renewal. Therefore, we expect the number of firms looking to renew their contracts (through IBM's perpetual and cloud services) will stabilize at 95%.
Recurring Infrastructure & Cloud Services Revenues
Much of IBM's Infrastructure and cloud services business is based on PaaS, IaaS and SaaS services. These services are recurring in nature as a client tends to resign with an existing service provider. As a result, contracts and services are renewed on expiry. We believe IBM would be able to maintain steady cash flows, even in tough times, in a segment where it is the market leader.
Business Analytics and Optimization
Global data volume is expected to increase by 29 times over to 35 zettabytes (a zettabyte is a 1 followed by 21 zeros) in the next ten years, according to research firm IDC. With enterprises needing a way to manage and mine potentially valuable information from this huge source of data, advanced data analytics will witness increased adoption.
IBM has built the world’s leading analytics practice. With more than 550 analytics patents, and several acquisitions, the firm has extended its capabilities beyond any other player in the market. IBM expects analytics solutions to contribute a mammoth $20 billion to its revenue by 2017, providing a significant boost to both its middleware software and services offerings.
TCS To Benefit from Increase In Demand For Infrastructure And Cloud Services and Contract Restructuring
TCS Services of IBM are aimed at enabling clients to reduce costs and improve productivity and efficiency. Within this segment, Infrastructure and Cloud services (ICS) forms almost 75% of the TCS revenues and 30% of overall revenues. Even though demand for outsourcing has declined post the recession, IBM has been restructuring low margin and value contracts that have resulted in a decrease in signing and outsourcing revenues over the past year i.e 2016. However, with the advent of cloud services and emphasis on data centers, ICS have grown at a fast pace and will continue to gain traction as companies look to cut costs and improve productivity in an increasingly competitive environment.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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