Microsoft and IBM Continue Transitions to New Markets

For the last year, through the first calendar quarter of 2013, Microsoft (NASDAQ: MSFT  ) has generated about $76 billion in revenues, so why would a mere $1.19 billion in sales in what is now a relatively minor $13.1 billion market, according to recent data from Gartner, warrant investor discussion? Or take the case of IBM (NYSE: IBM  ) and its $104.5 billion in annual revenues in 2012. Its paltry $1.63 billion piece of this particular pie hardly makes a dent, so what's the big deal?

For both Microsoft and IBM, there are a couple of reasons those "meager" results are big deals: One, the growth comes in the business intelligence (BI) market, which includes big data and cloud computing, both areas with tremendous upside potential. Secondly, the $1.19 billion in revenues for Microsoft and the $1.63 billion for IBM constitute a 12.2% and 9.9% jump from 2011 results, respectively. Both year-over-year growth percentages are easily the best of the BI bunch.

The data
The business intelligence market as a whole slowed in 2012, as per Gartner, but was able to eke out a nearly 7% jump in revenues compared to the prior year. Relative to 2011's growth of over 17%, last year was only so-so, but it's a burgeoning market and though the U.S. economy is improving, Europe and others haven't caught up. Along with what Gartner refers to as "confusion related to emerging technology terms," 2012's slower growth wasn't a surprise.

Overall, the five key BI players remained the same in 2012, though there was a change in the order. But the real story was in the rate of growth, for Microsoft and IBM on the upside, and the lack of improvement from the BI industry leaders.

The good news for SAP (NYSE: SAP  ) and Oracle (NYSE: ORCL  ) , Nos. 1 and 2 on Gartner's list with $2.9 billion and $1.95 billion in revenues, respectively, each retained their top positions. The downside, and especially troubling for Oracle CEO Larry Ellison considering his desire to grow cloud and related revenues, is that Oracle saw a mere 2% improvement from the prior year and 2012 BI sales were essentially flat for SAP.

IBM, courtesy of its 9.9% year-over-year growth, was able to push SAS -- the other player in the "big five" world of BI -- down to fourth. IBM CEO Virginia (Ginni) Rometty, like Ellison and others, has made no secret of her efforts to move beyond traditional revenue sources. Of course, Microsoft CEO Steve Ballmer is in the midst of the sometimes-painful transition to new products, services, and company culture.

For two industry heavyweights, being third and fifth on Gartner's list of BI leaders doesn't seem like much to shout about. But for IBM and Microsoft, their growth in this-up-and-coming market is yet another indication that both Ballmer and Rometty aren't just moving beyond traditional business drivers -- they're doing it successfully.

Now throw in attractive forward P/Es for each, along with solid dividend yields given today's low interest rate environment -- 2.59% for Microsoft and 1.85% for IBM -- and investors in search of growth and income have two options worthy of consideration.

 

It's been a frustrating path for Microsoft investors, who've watched the company fail to capitalize on high-growth markets over the past decade. In a new premium report on Microsoft, a Motley Fool analyst explains that while the opportunities are huge, so are the challenges. The report includes regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.


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