2 Companies Poised to Profit From the New Age of Technology
According to Forrester Research, more than $2 trillion will be spent on IT-related products and services this year, with a healthy portion of that on software and systems. Gartner put that figure at a whopping $3.7 trillion.
Where are all those IT dollars going?
After last quarter's disappointing results in its hardware business, IBM knows firsthand that IT spending isn't going to old-school mainframes and the like. Software as a service (SaaS), as well as cloud and data analytics as part of an integrated platform solution, is where the market's heading.
Why the shift away from hardware? Several reasons. Gone is the expense of building out traditional legacy systems only to see them become obsolete within nanoseconds with the advent of the latest, greatest technology. SaaS and business process as a services (BPaaS) are easy to deploy and easier still to upgrade. The flexibility to pick and choose what services are implemented and when, along with streamlined support and systems operations, are also attractive compared to traditional hardware.
How big is big?
Companies positioned to offer SaaS and other "as-a-service" solutions, particularly via the cloud, are going to prosper in the coming years, according to a recent report from Gartner. For simplicity's sake, let's say IT spending is somewhere in the middle of Forrester's and Gartner's predictions, at about $3 trillion for the year. According to Gartner, by 2018 a full 20% of IT dollars will be spent on integrated as-a-service solutions.
Assuming the overall IT market grows between now and then, SaaS could be a $650 billion to $700 billion industry in the next five years. That's a lot of revenue to be had, and it's why IBM and others are diligently working to transition from the old school to the new. For Foolish investors willing to buy and hold, that offers a lot of opportunity -- if you know where to look.
A couple options
IBM is a company in the midst of reinventing itself and, as Gartner's data suggests, it's making the change at an opportune time. Yes, last quarter's hardware business dropped 17% and was largely responsible for the 4% decline in revenue compared to last year. But that's not the end of the IBM story.
There are two bright spots for IBM going forward, and both tie in nicely with Gartner's prediction for the as-a-service integrated marketplace. First, IBM's cloud revenue jumped 70% in its most recent quarter compared to last year, pushing it past $1 billion for the first time. Second, IBM has not been shy about its desire to dominate in the business analytics and big-data spaces, and several of its recent acquisitions attest to that.
Like IBM, Microsoft is in the midst of a major transformation. While its headlong dive into mobile devices gets much of the ink, Microsoft is also positioning itself to benefit from the coming growth in SaaS, cloud, and related services over the next several years. Cloud revenue jumped 103% in Microsoft's fiscal 2014 Q1 announced Oct. 24, and it already has multiple, ready-to-deploy software offerings.
Office 365, Dynamics CRM, Exchange, SharePoint, and more are already fully integrated into Microsoft's cloud solutions and ready to be deployed. Again, like IBM, Microsoft also boasts an attractive valuation relative to its peers, making it a sound alternative for investors.
Final Foolish thoughts
Certainly there are a host of others already in the SaaS, cloud, and related services space, with salesforce.com coming to mind immediately. What separates IBM and Microsoft from the pack is the fact that both are in the midst of transitions, and that's kept their respective stock prices extremely reasonable for Fools who are willing and able to focus on 2015 and beyond.
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The article 2 Companies Poised to Profit From the New Age of Technology originally appeared on Fool.com.
Fool contributor Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Gartner and Salesforce.com. The Motley Fool owns shares of International Business Machines and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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