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Understanding IBM’s Value Proposition in the US Software Space

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Dec. 5 2016, Updated 2:35 p.m. ET

IBM’s scale in the systems software space

In this series, we’ve had a look at IBM’s (IBM) acquisitions, partnerships, and segment-by-segment performances in 3Q16. Despite 3Q16 being the company’s 18th consecutive quarter with no revenue growth, IBM’s Strategic Imperatives segment continued to post growth in 3Q16, indicating the success of the company’s initiatives and strategy.

IBM has continued its strategy of acquisitions and partnerships to chase growth. Now let’s look at the company’s value proposition among select US software companies. Let’s start with IBM’s size.

As of November 25, 2016, Microsoft (MSFT) continues to be the largest software player in the world by market capitalization. It’s followed by Oracle (ORCL) and IBM. SAP (SAP) is also a leading player in this space.

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Enterprise value multiples

Now let’s look at IBM’s EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple. We’ll also look at the multiples of other US software players.

IBM was trading at a forward EV-to-EBITDA multiple of ~9.13x on November 25, 2016. This metric was lower than Microsoft’s and Oracle’s multiples of ~10.39x and ~8.4x, respectively. The metric for SAP was 12.87x.

Dividend yields

IBM’s forward annual dividend yield was ~3.4% on November 25, 2016. This was higher than Microsoft’s and Oracle’s forward dividend yields of ~2.6% and ~1.5%, respectively, on November 25, 2016. SAP’s forward yield was 1.5% as of the same date.

If you’re interested in gaining exposure to IBM, you can consider investing in the SPDR S&P 500 ETF (SPY), which has 8.7% exposure to the application software space and invests ~0.70% of its holdings in IBM.

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