Information: The World's Most Valuable Commodity

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What is the cloud?  Better yet, what is information technology?  IT is the technology involving the development, maintenance, and use of computer systems, software, and networks for the processing and distribution of data.  This is a tad ambiguous, so let’s break it down even farther.   Information is defined as the communication or reception of knowledge or intelligence; and technology in itself is defined as the practical application of knowledge, especially in a particular area.  Thank you Webster.  Simply put, information technology is not only an efficient way to share knowledge with one another, but more importantly, a way to apply that knowledge in the most beneficial manner.

Still too abstract?  Maybe an example of a standard business application will help illustrate.  Say ‘Company X’ is a major retail company with department stores located all over the world, and they are trying to map sales performance of various products in their stores.  The old fashioned way to do this would be to have a manager compile inventory and sales data at the end of the day, week, or month and conjure up some measurable figure.  With information technology, however, the company can perform this function with much more efficiency and produce more reliable data by simply using software to record and analyze data at the point of sale.  So you have the first element, information:  the good that is purchased, the price paid, and the date and time in which the transaction was completed.  And you've got the second element, technology:  programmable software that uses statistical processes to turn your information into something that you can use to measure performance and make decisions.

Anyone who has managed to stay awake through a mid-level statistics course can appreciate the role that historical data plays in the development of predictive models, and until recently, companies would store vast amounts of data in house to be used later in product development and forecasting processes.  This is where the concept of the cloud was born.  From an operations stand-point, data storage is costly and tedious, requiring a network of hardware and IT professionals in place to monitor and service said hardware, not to mention the issue of cyber security.  Thus, cloud computing is the practice of storing regularly used computer data on a network of servers that can be accessed using the internet.  Ultimately, this means that a company can outsource the task of storing and safeguarding their data to a third party that is better equipped to handle the process, and simply pull information from the server whenever it is needed.

Analytical software and its application in the cloud is at the epicenter of todays’ software industry.  There are literally hundreds of companies operating in this market, some more speculative than others, but the more notable mentions would be names like Oracle (NYSE: ORCL), IBM (NYSE: IBM), and EMC (NYSE: EMC) who have carved out strong footholds in the industry.  A company operating in the highly competitive industry of information technology and services must meet some very specific criteria before it can be considered a sound investment prospect, even if it is a household name.

1.)           Stable and improving operating margin.  This is a measure of a company's overall profitability.  Growth in a company's operating margin indicates a reduction in the variable costs associated with the delivery of its services.  Operating margins can tell you a lot about the quality of management in a company.

2.)           Growth in earnings.  The information and technology services industry is still young and very much growth oriented.  If a stand-alone IT company is not growing than it is a sign of poor product delivery or lack of innovation.  If a company is not demonstrating consistent growth, than you can assume that the business is likely to fail.

3.)           Actively pursuing strategic acquisitions.  Given the competitive nature of this industry, it is crucial that companies acquire competitors in order to gain market share and expedite innovation processes.  Big bang takes little bang.

4.)           Product diversity.  Pioneers get killed, but settlers get slaughtered.  If a company wants to stay competitive in this industry it must be able to meet the needs of an evolving market.  Stay away from companies that are not finding ways to bring new clients into the market.

Let’s run our household names listed above through the gauntlet to see how they fair.

Operating Margin: 

Oracle:  38.49%                             IBM:  20.59%                                     EMC:  18.64%

All three companies have margins that are comfortably in line with industry standards; however, margin expansion has slowed considerably over the last several years.  Out of the three, Oracle seems to be the winner here, beating their industry standard by a whopping 33%.    

Earnings Growth (Year over Year):

Oracle:  17.7%                                IBM:  6.2%                                          EMC:  4.6%

Again, Oracle wins the earnings battle and gets a stamp of approval for having sound investment qualities.  EMC is still generating year over year revenue growth, which is why it edges out IBM in this segment as its year over year revenue is down by 0.6%. 

An important side note to mention here is that Oracle pays a dividend of .24 cents a share.  This is something that investors should come to expect from a company maintaining such an impressive operating margin.  If the company can continue to operate at such efficient levels I would expect this dividend to increase in the future.

Acquisitions:

Oracle:  Oracle is not afraid to put lose cash to work.  They have a history of gobbling up everything they can get their hands on, from database providers to application software; they are most definitely on the prowl.   

IBM:  The company has made many important acquisitions over the years, but more impressive is its record of scrapping projects that they no longer have competitive advantages in.  For example, the company's move out of the PC business and into business analytics.

EMC:  EMC has made some important additions to their company with the acquisition of VMware and others, but seems to be more interested in spinning these companies off and maintaining something of a partnership role, rather than uniting under one flag.

Products:

Oracle:  Oracles’ product base is nothing short of impressive.  There isn’t an analytical service that this company does not provide.  From the airline industry to healthcare, Oracle has it covered with software packages designed to cater to the specific needs of the industry.

IBM:  The company itself is incredibly diversified with stakes in the semiconductor industry as well as IT.  From a business analytics standpoint they are a formidable adversary to Oracle and others in the space.

EMC:  EMC is the laggard in this segment.  The company is a little light on analytics, preferring to focus more heavily on Big Data Storage and other hardware intensive applications.

Well then, now that you are informed you can start running some analysis of your own and get in the game.  The information technology industry is a very interesting one to follow and is changing the way we do business around the world.  There are lots of opportunities to be found, but remember to do your homework. 


SofJay has no position in any stocks mentioned. The Motley Fool owns shares of EMC, International Business Machines., and Oracle.. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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