Buying IBM’s Jump to Nano

Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In an era during which many corporate giants have seemingly lost their ability to adapt and evolve, IBM (NYSE: IBM) is bucking the trend and creating exciting new advantages for both its customers and its shareholders.

The company just released the next generation of, excuse me, mainframes, it has managed to transform itself from a PC maker into an enterprise service provider, and it is on the cusp of redefining how microchips are made. Silicon chips made by companies like Intel (NASDAQ: INTC) and Advanced Micro Devices (NYSE: AMD) have been getting increasingly small, but are predicted to be only a few generations away from hitting their minimum size. IBM is pioneering nanotube technology that may represent the next generation of microchips and come to revolutionize the market. Based on the company’s overall strength and its work with nanotubes, the stock is a buy at current levels.

Carbon Nanotube Technology

According to a recent report, IBM has “come up with a technique that will create chips based on carbon nanotubes, which offer better performance and thermal characteristics than the current exotic materials that etch transistors onto silicon wafers.” According to Moore’s Law – a principle posited by Intel co-founder Gordon E. Moore in 1965 – the number of transistors on an integrated circuit can double every 18 to 24 months. In keeping with this principle, silicon chips are expected to hit their maximum density in a few generations.

Using carbon to replace the wires that are placed on silicon wafers to transmit electrons makes them even faster and smaller than what is currently available. While others are working on alternative approaches to solve this problem, IBM seems to be leading the pack at this point. The company successfully tested a prototype that is only 10 nanometers across. To put this in context, the current leading-edge Intel chip is 22 nanometers, while some produced by AMD are 28 nanometers; 10 nanometers is where chips are expected to be three generations from now.

There are still several steps between the current state of development and being able to take the technology to the production phase, but results look promising. If IBM maintains its lead in the space, it has the potential to catapult the company back into a significant growth phase. Furthermore, the new technology could re-level the playing field, giving AMD a chance to get back in the game.

All that Other Stuff

IBM recently announced the release of its new series of mainframes. While you may find it impossible to believe that these computing mammoths are still in use, there remains nothing better for crunching huge amounts of data. For example, researchers are conducting studies into the correlation between one’s social networking activities and political views. The sheer volume of data makes mainframes an ideal choice.

In addition to continuing technology advances, IBM is making further financial strides as well. The company announced last week that it will conduct an additional $5 billion of stock buybacks. That amount is in addition to the remaining $6.7 billion already set aside for the same purpose. The company also said that it will seek funds for additional buybacks starting in April of 2013. IBM’s CEO went on record stating: "Our strategy to deliver high value solutions drives profit, earnings per share and cash growth.  We have achieved outstanding shareholder returns over the last decade and we are positioned well for the future.”

The Trade

Based on the company’s overall strength and its work at the leading edge of chip technology, the stock is an absolute buy for your core portfolio. The 1.7% dividend yield adds an income element to this already attractive stock, providing additional downside protection and incentive. Tracking the progress of this research is an important consideration for current and future shareholders.

Know What You Own

Intel's name is synonymous with the semiconductor, but savvy investors should constantly question whether there is a profit opportunity left from the stock. Thankfully, The Motley Fool has assembled a special report detailing the opportunity, risks, and Foolish bottom-line analysis on the company. Today, you can gain instant access to this report by simply clicking here now.

Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines and Intel. Motley Fool newsletter services recommend International Business Machines and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.

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