IBM's Magic May Wear Off - TheStreet

ARMONK, N.Y. (TheStreet) -- IBM (IBM) - Get Report may have mastered the complex art of boosting earnings while its revenue stalls, but there could be more upside for investors by looking elsewhere in the tech sector.

IBM's

fourth-quarter results

, released after market close on Tuesday, continued IBM's recent

earnings growth

.

IBM's earnings leapt 10% to $3.59 a share and the company also raised its earnings guidance for 2010 to over $11. Big Blue's revenue, however, increased just 1% year-over-year, slipping 5% adjusted for currency.

The results, while testament to IBM's ability to squeeze

profit from

high-margin

businesses such as software and services, should also be viewed within the context of the broader tech sector.

"Quarter after quarter, IBM solidifies its position as one of the best run companies on the planet," wrote Brian Marshall, an analyst at Broadpoint AmTech, in a note released on Wednesday. "However, we currently prefer long exposure to other enterprise infrastructure names in our coverage universe (e.g. EMC, BRCD, etc.) due to superior risk/reward profiles."

Specifically, Marshall cites storage companies

EMC

(EMC)

and

Brocade

(BRCD)

as offering better revenue growth and operating leverage than Big Blue. As for investor upside, he explains that shares of EMC and Brocade rose 170% and 67% respectively during 2009, compared to IBM's 56% share growth.

Marshall's sentiments were echoed by Goldman Sachs analyst David Bailey, who

reiterated

his view that EMC,

Dell

(DELL) - Get Report

,

Arrow

(ARW) - Get Report

and

Molex

(MOLX)

are all more attractive stocks.

"IBM's 4Q earnings upside was only $0.02 (less than 1%), excluding a $0.09 benefit from a lower tax rate, and we continue to recommend companies with greater top-line and operating leverage potential," he wrote in a note released on Wednesday.

Shares of IBM fell $3.71, or 2.71%, to $130.43, on Wednesday as investors shrugged off the company's results.

Shortly after market open, EMC and Brocade were trading at $17.86 and $7.84 respectively, although both dipped roughly in line with the broader retreat in tech stocks that saw the Nasdaq fall 0.93%.

IBM, which posted fourth-quarter sales of $27.2 billion, still expects a revenue boost in the first quarter. During a conference call to discuss the company's results late on Tuesday, IBM CFO Mark Loughridge predicted mid single-digit revenue at actual rates, with software posting double-digit growth.

"We are confident in our ability to continue to leverage our business model to expand margin, grow profit, generate cash, return value to shareholders and return to revenue growth in 2010," said Loughridge.

IBM's software business returned to revenue growth during the fourth quarter -- albeit at a modest 2% -- boosted by the company's middleware offerings. Sales of middleware products such as WebSphere and Tivoli, which allow computer programs to communicate with each other, were $4.1 billion, an increase of 6% compared to the prior year's quarter, although flat adjusted for currency.

The company's software business also posted its highest-ever operating profit of 46.5%.

"IBM Software is emerging from the recession more profitable and primed for growth," Allan Krans, a senior research analyst at Technology Business Research (TBR), wrote in a note released on Tuesday. "With the economy stabilizing and software profitability at record levels, TBR expects IBM to accelerate software acquisition spending in 2010 in order to drive growth."

-- Reported by James Rogers in New York