IBM Is Beating Microsoft in This Emerging Tech

9/22/17

By Leo Sun, Motley Fool

Microsoft (NASDAQ:MSFT) is usually considered a better "mature tech" play than IBM(NYSE:IBM) for a few simple reasons: Microsoft pivoted from its aging OS and productivity software businesses toward higher-growth cloud services, and it consistently reports positive revenue growth. IBM tried to pivot away from its legacy businesses with higher-growth cloud services, but it's posted 21 straight quarters of year-over-year revenue declines.

The two companies' fortunes should continue to diverge -- analysts expect Microsoft's revenue to rise 8% this year and for IBM's to drop 3%. That's probably why Microsoft stock rallied more than 20% this year, while IBM's fell over 10%.

A graphical visualization of a blockchain network.

IMAGE SOURCE: GETTY IMAGES.

At first glance, Microsoft is crushing Big Blue in next-gen markets like the cloud. Its Azure cloud platform generates much more revenue than IBM's Bluemix, and is currently the second-largest cloud platform after Amazon.com's Amazon Web Services (AWS).

But IBM is still holding its ground in several key technologies. These areas including machine learning and artificial intelligence with Watson, quantum computing systems, and blockchain -- the technology best known for the creation of the cryptocurrency bitcoin. In fact, Juniper Research recently reported that over 40% of executives in blockchain-related businesses saw IBM as the top blockchain player, while only 20% said the same about Microsoft.

Why that's good news for IBM

Being a top blockchain player doesn't mean that IBM will start mining bitcoins for revenue. Instead, it means that IBM's blockchain technology could help major companies streamline their operations.

A physical bitcoin.

IMAGE SOURCE: GETTY IMAGES.

A blockchain is a decentralized log of data that is spread out across various locations. The data is secured in encrypted "blocks," which are accessed through a peer-to-peer network. The original blockchain was a distributed ledger for bitcoin transactions, and the encryption of the blocks makes the transactions tamper-proof.

However, blockchain can also be used to secure enterprise networks and trace transactions. For example, IBM recently announced partnerships with Wal-Mart, Unilever, and Nestle to trace the origins of their produce through a blockchain ledger.

That system, IBM claims, can trace contaminated food within seconds and "provide transparency" across the entire food supply ecosystem. During a shareholder meeting in June, Wal-Mart food safety VP Frank Yiannas demonstrated IBM's blockchain technology tracking the condition and origin of a product in 2.2 seconds -- a process that would have taken nearly a week with previous methods.

But that's not all -- IBM also recently signed blockchain partnerships with shipping company Maersk to improve its logistics, as well as seven leading European banks to facilitate international trade for small to medium-sized businesses. That list should grow longer in the future, since Juniper Research previously reported that 57% of the world's large corporations were considering the deployment of blockchain solutions for various purposes.

But will blockchain really move the needle for IBM?

IBM's progress with blockchain sounds great, but investors have probably grown accustomed to the company making big announcements that don't really move the needle. IBM announced plenty of partnerships with companies in the cloud, analytics, and AI markets, but none of those deals produced a single quarter of sales growth in over five years.

Moreover, the year-over-year growth of IBM's "strategic imperatives" (cloud, mobile, social, analytics, and security) has slowed down in recent quarters, torpedoing the bullish notion that its higher-growth businesses can offset the softness of its legacy (IT services, business software, and hardware) businesses.

Nonetheless, the increased adoption of IBM's blockchain solutions could strengthen its older global business services and technology/cloud platform services units, and potentially expand Big Blue's enterprise ecosystem. Investors should also remember that the vast majority of the world's biggest banks, telcos, and retailers still use IBM services -- so it has plenty of room to expand its blockchain business.

Therefore, IBM's lead in the blockchain market might not matter over the next few quarters, but it could widen its moat as more companies secure and streamline their businesses with blockchain solutions.

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