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The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (

Trefis

) --

IBM

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derives the bulk of its revenues from server sales, including system z, system x and system p servers, for which IBM is the global market leader.

It competes against

H-P

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,

Dell

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and

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Oracle

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in the server market.

IBM's hardware sales don't contribute much to its equity value.

In its first-quarter earnings, IBM exceeded expectations, posting strong revenue growth in its hardware business segment. However, this improvement doesn't add much to IBM's stock value because of the small contribution of the hardware segment to the company's overall value.

We currently have a $185 price estimate for IBM, about 10% ahead of market price, and estimate that the hardware business represents only 2% of IBM's equity value.

The hardware business typically has lower margins compared to software or services businesses. Although hardware sales accounted for 18% of IBM's revenues in 2010, it contributed only 9.8% to Big Blue's EBITDA.

The server business EBITDA margin of roughly 13% in 2010 was much lower than that of IBM's software, services or financing businesses. While we currently forecast that server EBITDA margin will hover around 13% going forward, the potential upside from this segment is limited given its relatively small contribution to the company's value. An increase in server EBITDA margin to 15%, for example, would only imply $2 of upside to our $185 price estimate for IBM's stock.

Despite the low contribution to IBM's stock value, the server business does hold importance and significant intangible value for IBM, as a number of software solutions and services provided by the firm are based on its installed server base.

See our full analysis of IBM stock

here

.

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