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Stock Analyst Update

Mainframe Platform a Boost for IBM

We're raising our fair value estimate for the tech giant.

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Despite a general archaic view, we think the mainframe continues to hold a critical place in enterprise computing. The inherent reliability and stability of the platform remain key reasons for its continued existence, and clients reinforce this when weighing future security, continuity, and cost considerations in their IT environments. For  IBM, (IBM) we don't expect the mainframe market to grow over the long term. However, with a monopoly-like position, high switching costs, and a large entrenched customer base, we believe the mainframe market remains a sensible investment, providing financial stability and time for IBM to rotate its portfolio to "Strategic Imperatives." Our analysis that the z Systems ecosystem accounts for roughly 22% of IBM's total revenue and about 30% of the company's total gross profit supports this.

We believe that the mainframe is best suited for certain enterprise tasks, such as batch processing or online transaction processing, and the embedded nature of the mainframe is evident from its long list of clients that run their essential applications on the platform. With the recent release of the z14, we believe the mainframe still has an important role in enterprise IT. Modernization and integration efforts are opening the platform to today's modern computing environments, without leaving the mainframe as an obscure, isolated piece of technology. In addition, pervasive encryption is a particularly interesting selling point for the z14 given heightened regulatory scrutiny associated with data protection.

We recently raised our fair value estimate for IBM to $168 from $158, as we're more optimistic about the ongoing relevance of the mainframe platform. With IBM trading at an approximate 8% discount to our fair value estimate, we see a modest margin of safety at current levels and would look to accumulate a position in the company upon a pullback.

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Andrew Lange does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.