(IBM) IBM to Focus on Analytics

Analytics has emerged as the new focal point for IBM Corp. (IBM) in 2012.The company looks set to drive significant growth in this fast-growing sector, according to CEO Virginia Rometty.

The strong growth of analytics can be attributed to the increasing complexity enterprises are facing in the decision making process. According to market research firm Gartner, analytics is expected to be one of the topmost strategic technologies for 2012.

The research firm believes that the scope of analytics will expand manifold over the next few years, and will be a must for enterprises. We believe that IBM remains well positioned to grab this opportunity going forward.

Business analytics is one of the four key long-term growth initiatives of IBM, in addition to cloud computing, smarter planet and growth markets. IBM expects business analytics to grow to a $16.0 billion business by 2015. The company expects the initiative to contribute approximately 20.0% of IBM’s growth by 2015.

IBM expects to achieve this strong growth based on accretive acquisitions. Since 2005, the company has invested $14.0 billion in acquiring 25 companies. To date, IBM has engaged more than 10,000 technical professionals and 7,500 consultants in its analytics operations. IBM has eight analytics solutions centers across the world and has more than 100 analytics-based research assets.

We also believe that the gradual shift of analytics to the cloud will increase the adoption of analytics among large enterprises going forward. With this shift, analytics will be able to exploit cloud resources for high performance and grid computing, thereby reducing cost and time in effective decision making process. We believe that IBM’s product portfolio is well positioned to benefit from this shift going forward.

We believe that IBM’s focus on cloud computing will also boost its growth over the long term. The cloud computing market is expected to grow at a CAGR of 40.0% from 2010 to 2015, crossing $7.0 billion in revenues by 2015. Here also, the company expects to drive growth through acquisitions.

IBM’s strong cash balance enables it to acquire companies with high intellectual property (IP), which will drive further growth in the upcoming quarters. With $20 billion to spend until 2015 on acquisitions, we expect IBM to remain an aggressive acquirer of companies, which it deems necessary to achieve its 2015 goals.

We have a long-term Neutral recommendation on IBM and are optimistic about its strong fundamentals and robust growth prospects going forward.

However, the competitive landscape includes technology giants, such as Oracle Corp. (ORCL), Hewlett-Packard Co. (HPQ), Microsoft Corp (MSFT) and EMC Corp (EMC), all of which have joined IBM in the cloud computing and analytics market. Moreover, we expect that a sluggish IT spending in 2012 will also remain an overhang on the stock going forward.

We currently have a Zacks #3 Rank for IBM, which translates into a short-term Hold rating.

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