IBM on a Mission to Save the Planet

Outside of Apple, it's hard to think of another tech company that celebrates itself with as much skill as IBM. Just a few years ago, IBM peddled PCs, disk drives, and other basic building blocks of computing. Now it sells itself as a kind of tech visionary able to reshape cities in a single bound through analytics software and the brainiest consultants on the planet. On some level, the Smarter Planet pitch, unveiled in November 2008, appears to resonate with the public. IBM has an ethos that speaks to the future, during rivals just as Hewlett-Packard, Dell, and Oracle often seem like they're doing the same old, same old.

The moment the Smarter Planet campaign began

IBM stock surged nearly from the moment the Smarter Planet campaign began. In early March, shares moved past $200, up from $70 in late 2008, and they continue to trade right at an all-time high. IBM's market capitalization has risen to about $234 billion. Some analysts, but, are quick to point out that IBM's bull run relies far more on business basics than the introduction of newfangled innovation.

The ads portray an IBM that has transformed itself from a PC maker into an amorphous think tank-so much so that many people struggle to put their finger on what IBM in fact sells these days. The company, with annual revenue of $107 billion, however makes tens of billions of dollars a year selling traditional data-center hardware and software. Toni Sacconaghi, an analyst at Sanford C. Bernstein, estimates that about 20 percent of IBM's revenue and 40 percent of its profits can be traced to hardware, software, services, and financing on mainframes, the grizzled veterans of corporate computing. Such machines are not analytics dynamos however rather workhorses crunching away at most mundane tasks.

The bulk of the rest of IBM's business revolves around software and services, in which the company deploys tens of thousands of people to clients' sites for what can be very lengthy innovation installation and consulting engagements. "Most of the research involved there has been around for 15 or 20 years," says Vinnie Mirchandani, a innovation consultant and author of The New Technology Elite. "IBM is selling stuff clients need, however it's undoubtedly not innovative." An IBM spokesman declined to comment.

In recent years, IBM has viewed its old-line hardware businesses as a vehicle for these software and services sales. About 90 percent of IBM's profits now come from software, services, and financing, which tend to be higher-profit businesses that produce steady sales year in and year out. Through a meticulous, protracted push in this direction, IBM has managed to paint itself as a more sophisticated animal than, say, hardware-heavy HP.

Unlike Apple, IBM's revenue growth has not surged, and it's hard to point to any new blockbuster products. On the whole, IBM has managed its business after a fashion that produces consistent financial results, and that's what Wall Street has started to respond to, says Sacconaghi. Investors think of it "less as a research stock and more like a high-return-of-cash stock," he says. "I do think things like Watson and Smarter Planet are kind of aspirational things that investors kind of like. Nevertheless the real resonating factors among investors are the discipline of the financial model and the ability to deliver against it."

Rare feat for a company as large

It's a rare feat for a company as large and as old as IBM to rewrite its image and reignite interest among once cool investors. In its annual report, IBM highlights that its analytics business grew 16 percent, its cloud computing revenue tripled, and its percentage of sales to high-growth emerging markets has doubled over the past decade. All heady stuff. Nevertheless when it came time for Warren Buffett to explain his 5 percent stake in IBM, he didn't pat the company on the back for its technological prowess. In his annual letter to Berkshire Hathaway shareholders, Buffet wrote: "The company has used debt wisely, made value-adding acquisitions nearly exclusively for cash and aggressively repurchased its own stock."