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When Does IBM Become Overrated?

However, management was able to offset this weakness in software, which advanced 1% year over year. But here too the company is being outpaced by Oracle. Plus, a case can be made that even Salesforce.com (CRM - Get Report), which has done an excellent job building itself into a leading software-as-a-service (SaaS) business, is winning market share from IBM.

What's more, even though IBM's 1% year-over-year revenue improvement is encouraging, especially given the weak tenor of tech spending, the performance still fell short of Street estimates. This is while hardware revenue arrived down 13% when excluding discontinued businesses.

The feeble hardware situation is important for several reasons. Though I expect IBM to navigate through this period unscathed, it certainly doesn't bode well for the likes of HP (HPQ) and Dell (DELL), which rely heavily on server revenue. To that end, it does seem as if the competition is beginning to chip away at IBM's profitability.

Ordinarily, the bottom line has always been a standout for IBM as the company has consistently gone after higher-margin business. Even though the company did beat estimates on non-GAAP gross margin, the fact that gross margin increased by only one point was a disappointment, especially because IBM advanced gross margin by more than two points in the fourth quarter. Plus, it didn't help that adjusted operating income fell by 1%.

There are numerous scenarios that can be extracted from these results. The first is that, given the revenue decline, we can safely say that IBM is seeing increased competition from Oracle and Salesforce.com, which have also begun to chip away at IBM's margins. What's more, we can't rule out the progress that SAP (SAP) has made in the SaaS market, either. Where does IBM go from here?

This quarter's report notwithstanding, IBM deserves a considerable amount of respect for its bellwether status. But it's nonetheless remarkable how the company has escaped the wrath of investors over the years even as its growth has slowed to a crawl. The company has figured out ways to be seen as more shareholder-friendly.

Aside from sporting some of the best margins in the business, very few companies can compare to IBM when it comes to return on equity. This is while the company has also paid a handsome dividend. There are also companies like Apple (AAPL - Get Report) that can boast the same things.

But in Apple's case, the stock had plummeted 45% in seven months to its recent low of $385. Although the shares have since rebounded close to 17%, you would think that the deluge of negative headlines that preceded the declines that Apple was on its deathbed. Yet Apple had just come off a first quarter during which revenue grew 18% year over year to $54 billion.

Similarly, in Apple's second quarter, although revenue arrived up at just 11%, the performance sure as heck beats IBM's 5% decline. Nevertheless, all we hear is how Samsung's been eating Apple's lunch, while Google (GOOG) serves it on a platter with the help of Android. But if that's true, then given IBM's lack of growth over the years, it must also be true that Oracle and Salesforce (among others) have been bullying IBM around.

Remarkably, though, IBM's stock has never fallen more than 15% over the past 12 months, whereas Apple's valuation was almost cut in half. This despite Apple beating IBM in every statistical category that matters, including cash and debt. If Apple is seen as on the decline and overrated, why isn't IBM?

At the time of publication, the author was long AAPL..

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.
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