NEW YORK (TheStreet) -- The 7% fall of IBM's (IBM) stock following its earnings disappointment has shares of other big technology names, including SAP (SAP) , Hewlett-Packard (HPQ) and Oracle (ORCL) , lower, too.
The sector's problem is cloud technology. Cloud is changing how big business does its computing. The big players know this and that is why they've been spending money to get into that business. Either Big Tech opens their wallets and buys out cloud companies now or these companies will buy out Big Tech later.
But as Big Tech looks for cloud companies to buy, there's a problem: There aren't many targets left.
Big cloud vendors including Facebook (FB) , Amazon.Com (AMZN) and Google (GOOGL) have long served consumers with off-the-shelf commodity hardware and data centers they build themselves. Businesses also use open source software supported by Red Hat (RHT) , VMware (VMW) and other companies to drive costs down further.
Red Hat has nearly doubled in value over the last five years, to $10.6 billion. VMware, which is 80% owned by cloud storage company EMC (EMC) , has given its shareholders just as good a ride.
Both these companies are considered "arms merchants" to the cloud. Think of their software as a cloud operating system. What delivers bottom-line results are applications, and this is where the big tech companies have been focusing their money until now.
Cloud applications turn the big data collected on clouds into knowledge upon which management can act quickly. This provides enormous value. Workday (WDAY) , whose human resources system is built on a cloud platform, is recovering quickly from the damage done in the recent pullback. The company's market cap of $15.4 billion is 31 times its revenue for 2014 and it has yet to make a profit.
The bigger techs have been buying cloud applications as quickly as they can. SAP's recently-announced purchase of Concur Technologies (CNQR) for a price of more than 10 times its annual sales is typical.
In this case think of SAP or Oracle as being analogous to a big pharmaceutical company like Pfizer (PFE) or Merck (MRK) and companies like Concur and Workday as being more like "hot" biotechs. The big companies buy the small ones for growth.
However, of the 10 largest cloud application players by revenue identified by R.W. Baird last year only Akamai (AKAM) and LinkedIn (LNKD) remain independent. The others -- Taleo, SuccessFactors, Concur, Omniture and Ariba -- have all been bought.
IBM has not played this game lately, preferring smaller acquisitions. The hope was that cloud security companies like Crossideas and Lighthouse Security Group, and database-as-a-service companies like Cloudant, all purchased in 2014, would lift software revenue. But software revenue were down in the most recent quarter.
All this leaves the largest cloud application company, Salesforce.Com (CRM) , in a strong position. Salesforce is expecting revenue over $5 billion this year, and its market cap is almost $35 billion. That's more than half the market cap of HP but still a fraction of the market cap of Oracle or IBM. Could either company excite investors by putting Salesforce CEO Marc Benioff into their CEO chairs?
At the time of publication, the author was long AMZN, GOOG and GOOGL, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates INTL BUSINESS MACHINES CORP as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate INTL BUSINESS MACHINES CORP (IBM) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its growth in earnings per share, increase in net income, notable return on equity, good cash flow from operations and expanding profit margins. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."
You can view the full analysis from the report here: IBM Ratings Report