International Business Machines' (NYSE:IBM) second-quarter report wasn't up to the mark, even though the company beat revenue and earnings expectations. Analysts picked on IBM's slower-than-expected growth in software, which grew just 1% from last year, compared to an expectation of 3%. However, IBM expects this segment to get back on track in the second half of the year, projecting growth in the mid-single digits.
Moreover, IBM recently signed a deal with Apple (NASDAQ:AAPL), which will improve its enterprise software business. In addition, the company is already tapping data centers and cloud computing with a number of solutions. So, investors need to look beyond a small hiccup in IBM's latest earnings and focus on the long run.
Investing for the future
IBM is seeing double-digit growth in emerging technologies in enterprise IT. The company is focused on driving innovation, apart from stability, in its core franchises.
In the first quarter, IBM launched its cloud platform-as-a-service for the enterprise, known as Bluemix. In addition, IBM made an investment of $1.2 billion to expand its SoftLayer cloud hubs globally, apart from investing $1 billion to bring the Watson supercomputer's cognitive capabilities to the enterprise segment.
IBM expanded the availability of Bluemix in the second quarter, and also opened new SoftLayer data centers. IBM plans to invest $3 billion for the next five years in research and initial-stage development to create the next generation of chip technologies. With this move, the company expects to address the growing need for cloud, big data, and cognitive systems.
The Apple deal will be a boost
IBM's partnership with Apple is a step in this direction. The two companies entered into a strategic global partnership to deliver mobility solutions to enterprise clients. The partnership aims at delivering a new class of enterprise-ready, mobile-first business applications for iOS. According to the press release announcing the partnership, IBM will help develop more than 100 industry-specific native apps for enterprise deployment, and optimize its cloud services for iOS devices.
This deal should be profitable for both companies. IBM will be able to offer a robust suite of enterprise applications for mobile devices. Apple, on the other hand, will see an increase in sales of iPhones and iPads to IBM's enterprise clients. Through this partnership, IBM's consultants and other client-facing specialists will be able to improve mobile device productivity, thereby enabling big data and analytics in an efficient manner.
The company is already reporting good growth in emerging markets. For example, IBM's Brazilian market grew more than 20% year over year in the previous quarter, driven by large deals in the financial sector. The company is also seeing a better business environment in India.
IBM is further expanding its footprint in emerging markets, and has opened a cloud data center in Hong Kong. The company recently opened another data center in London during the second quarter and plans to launch additional capacity in the third and fourth quarters as well.
Looking ahead, IBM aims at sustaining this healthy growth, driven by its focus in strategic areas such as mobile and security. In addition, growth in some of its core franchises, such as app servers and distributed databases, will also fuel its development.
The bottom line
Finally, IBM's valuation looks attractive. A trailing P/E of 13 and a forward P/E of almost 10 suggest that the company's earnings will increase. Moreover, IBM is cheaper than the industry average P/E ratio of 17. The company also pays an impressive 2.4% dividend, which should reward investors for their patience as IBM transitions its business.