IBM (IBM 0.16%) is leading the Dow Jones Industrial Average (^DJI 0.69%) down as the company holds its investor day. As of 1:30 p.m. EDT the Dow was down 51 points to 16,665. The S&P 500 (^GSPC 1.20%) was down three points to 1,895.
IBM is holding its investor day in New York City today; investors who didn't make it can watch through the company's live webcast. CFO Martin Schroeter reiterated IBM's target for 2015 of at least $20 in earnings per share, up from this year's expectations of $15 per share. Schroeter said, "Quite frankly, we are seeing very good growth out of software, good growth out of services, but challenges in hardware."
"Challenges" is an understatement, as the company's hardware business dropped 20% in the first quarter after a 20% drop in the fourth quarter of 2013. While CEO Ginni Rometty believes the drop in the server business is cyclical, some are not so sure, as there is fallout worldwide from Edward Snowden's disclosures last year of U.S. tech companies helping the U.S. government spy abroad.
So where will the $5 increase in EPS come from? Schroeter expects an additional $3.25 through higher-margin services, and another $2 through increased share repurchases. IBM is focused on a few main areas, namely, cloud computing, data, mobile, social, and security. The most high-profile of these efforts is the company's Watson cloud computing project. IBM has been investing heavily in it since 2006 and gave its first real public demonstration through its performances on Jeopardy! in 2011.
The company has expanded the Watson project and the technology behind it into fields that require large data-processing capacity and real-time solutions, namely the financial-services sector and the health care sector. Also coming out of the project are spinoffs such as the new technology revealed this week: "elastic storage." The company claims the technology will allow for up to a 90% reduction in storage costs by allowing customers to use cheap servers together to form a data center and add servers one at a time instead of buying massive arrays for storage.
While many investors are sullen on IBM's prospects, Warren Buffett has taken the long view on the company, and his Berkshire Hathaway is now IBM's largest shareholder. With a 103-year history and a CEO with a long time horizon, IBM should continue to be an innovator and a major presence in the technology world for years to come.
