IBM Hones in on Data Analytics
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Business data analytics has been a hot commodity recently. Companies have been looking for ways to gain valuable insights on its business based on advanced business intelligence and analytics. Given the amount of data that an enterprise needs, this market holds big promise. In fact, this business performed well even during recession. The reason is fairly obvious. Most enterprises want to know how to perform and allocate resources in any kind of environment.
For the last few years, IT giant (also known as the Big Blue) IBM (NYSE: IBM) has been on an acquisition binge. Big Blue has been snapping names in the big data analytics portfolio.
It acquired Pittsburg-based software developer Vivismo for an undisclosed sum. The software developer is a good match on IBM’s big data analytics portfolio. Vivismo wrote the software that automatically scans, collates and captures both structured and unstructured data in a user-friendly format. The end users can easily analyze, navigate the data and effectively transform the data to facilitate decision making.
It also integrates business analytics functions with back-end search abilities. This allows clients to refine data structure for better and quick analysis. It also speeds up the decision making process. Relative to traditional offerings, this saves time from efficient analytical tools. Also it eliminates the need for a centralized data warehouse.
It has more than 140 clients in different industries. This also gives IBM the edge in tapping those clients with its other offerings. Its clients include US Airforce and Navy, Social Security Administration, Defense Intelligence, as well other big names in the corporate world. Vivismo will operate within the software group.
Building Scale in the Big Data Business
The competitive advantage of IBM is scale. This basically eliminates a lot of competition. Smaller players in the niche markets that it operates have small chances beating IBM. For example, the best way for Dell (NASDAQ: DELL) and Hewlett-Packard (HPQ) to grab market share in the big data market business is to look for small and medium scale enterprises which both big players IBM and Intel (NYSE: INTC) fail to capture.
According to IBM estimates, around 2.5 billion quintillion bytes of data are created daily. The need to manage this amount of data will increase rapidly in the future. Thus, this is a big market for everyone to put their hands on. Research firms have also confirmed the bright prospects for the industry. Based on research firm IDC, revenues for big data is estimated to grow to $3.3 billion in 2016. This is a 3.09 times growth from 2011 big data revenues of $805 million. The firm said that enterprise will continue to realize the advantage of leveraging the value of its data.
It is not surprising for IBM to beef up its acquisitions in the big data space. The Vivismo is the 30th acquisition so far. The acquisition includes Cognos, SPSS, Netezza, Coremetris, Algorithmics, DemandTec and Emptoris. It also acquired Varicent in April, a big data supplier and software maker for front-end operations such as sales and finance. It also inked a partnership with Cloudera, the developer of Apache Hadoop. Cloudera will support IBM’s third party Hadoop distribution, which will help expand Big Blue’s big data services ambitions.
It has allotted $100 billion for research and development on this space. This is 5 times the annual cash flow of IBM. This means that IBM is serious with its plan to become a big supplier of data analytics. So far, it has spent at least $16 billion on these acquisitions. It will come as no surprises if the company will add more names on its portfolio.
Moving forward, these acquisitions will carve IBM’s position in the growing big data market. It also provides significant advantage over other players in the space such as Oracle (ORCL), SAP (NYSE: SAP) and EMC (EMC). I believe the strategy is to integrate all of these acquisitions and leverage the IBM brand to its clients.
Business Analytics is part of the growth plan
Over the last 5 years, the company has grown its earnings by 16% a year. This is partly due to the expansion into various IT services. In fact, it has stated in the past that its main focus is to grow its profits over time. For the next 5 years, analysts expect that earnings will grow by 10%. This is a relatively good growth rate considering how big IBM is.
It also said that business analytics will be one of the key drivers of growth, alongside with cloud computing and other growth markets. It expects business analytics to grow to a $16 billion business segment for them. This equates to a growth rate of 20% a year.
The risks to this growth rate is the sluggish IT spending of both the corporate and government. I am also worried that significant competition from different vendors will put pressure on its margins in the future. Despite these concerns, IBM can withstand uncertainties over IT spending with healthy financial position. Also its large scale in the big data business will keep competitors away from eating its market share.
The stock is currently trading at 12 times 2012 earnings. This is lower than the 15 times average earnings multiples for the last 5 years. In terms of valuation, it could trade as much as 18 to 20 times as soon as IT spending picks up.
It also carries a dividend yield of 1.80%. For the last 5 years, it has grown its dividends by 21% a year. This suggests an average dividend payout of 21% of net profits. In the long run, dividend payout will be steady given its planned acquisitions in the future.
In contrast, Intel trades at 11 times earnings and has a dividend yield of 3.30%. Other players like Oracle are valued at 14 times earnings and SAP trades at 15 times earnings. It seems these players are valued at the lower end of their valuations due to the uncertainties and lower IT spending. As soon as these factors improve, the major players like IBM will sport high end earnings multiples.
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