IBM’s Value Proposition in the US Software Space



IBM’s scale in the systems software space

Now that we’ve discussed IBM’s (IBM) fiscal 4Q16 results, and plans to report growth in 2017, let’s look at its value proposition among US software companies. As of February 27, 2017, Microsoft (MSFT) was the largest software player by market capitalization globally, followed by Oracle (ORCL). IBM placed third according to market capitalization. SAP (SAP) is also a leading player in this space.

All of these players tried to enhance and strengthen their positions in AI (artificial intelligence), machine learning, and the IoT (Internet of Things) through acquisitions in 2016. As these technologies are expected to be more prominent in the next computing cycle, their initiatives are likely to grow in 2017.

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Enterprise value multiples

IBM was trading at a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of ~10.5x on February 27, 2017. This metric was lower than Microsoft’s multiple of ~12.7x but higher than Oracle’s multiple of ~10.4x. SAP’s metric was 14.5x.

Dividend yields

IBM’s forward annual dividend yield was ~3.1% in 2016, higher than Microsoft’s and Oracle’s forward dividend yields of ~2.4% and ~1.4%, respectively. SAP’s forward yield was 1.4%. In the next and final part of our series, we’ll look at analysts’ recommendations for IBM.


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