Morningstar | Even With a Lethargic Core Business, IBM Remains Entrenched in Its Large Customer Base
IBM is in the middle of yet another digital revolution, and while the jury is still out on the long-term strategic and financial success of initiatives like analytics and cloud computing, we think rising sales from these products will mostly offset slow declines in legacy businesses. IBM’s large, profitable, and sticky core operations will protect the company from any precipitous slide in competitive positioning, but we think its economic moat has narrowed, as we have concerns about the economics and competitive dynamics of its newer initiatives.IBM’s pervasiveness across the enterprise IT landscape is undeniable, as the company has been at the forefront of providing high-quality IT hardware, software, and services on a global scale for decades. Still, enterprise adoption of cloud computing, commoditization of hardware, and exposure to legacy IT services mean that IBM needs to pivot. Its core operations are stagnant, and the company is doubling down on higher-growth "strategic imperatives," to counteract the growth shortfall.Even with a lethargic core business, IBM remains entrenched in its large customer base. Its products and services are inherently sticky, given their often mission-critical nature, and we believe the company’s brand premium precedes it. Investment in strategic imperatives, including social, mobile, analytics, cloud, and security technologies, will change the firm's complexion, but IBM is not unique in this. Almost every software and/or services provider has the same investment agenda. We are cautious regarding these newer initiatives' long-term switching costs, given the increasing ease of systems integration, software and service standardization and industrialization, and pay-as-you-go as-a-service business models.Though still in the early stages, we think investments in IBM Cloud (a combination of SoftLayer and Bluemix); pending acquisition of Red Hat; establishment of development platforms like Watson Developer Cloud; and enterprise application partnerships with leading global companies present positive opportunities for IBM. Still, more work remains to be done.International Business Machines provides integrated solutions and products that utilize data, information technology, capability in industries and business processes. The company has five segments: Cloud and Cognitive Software, which provides a range of software offerings; Global Business Services, which provides consulting, systems integration, application management and business process outsourcing services; Global Technology Services, which provides project services, managed and outsourcing services, cloud-delivered services, and technical and IT support services; Systems, which provides technology and service; and Global Financing, which provides client financing, among others.
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