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Tickers in this Article: IBM, HPQ, DELL, CSCO, EMC, ORCL, MSFT
IBM (NYSE:IBM) can be a frustrating stock to evaluate. On one hand, it really is a tech bellweather with its hands in many different cookie jars. On the other hand, in a tech word that craves growth over almost everything else, IBM's sheer size works against it. And then, of course, there is the quality question. It has been quite a while since analysts have had the same sort of existential worries about IBM that currently plague former tech darlings like Hewlett-Packard (NYSE:HPQ), Dell (Nasdaq:DELL) and Cisco (Nasdaq:CSCO).

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A Somewhat Disappointing Third Quarter
IBM missed the average analyst sales estimate and that's all some tech traders will care about when it comes to evaluating this quarter. It's true, year-on-year growth of 8% (3% in constant currency) is not great, and the 2% sequential decline is also concerning.

Looking a little deeper, software was the strongest segment with 6% growth - a good sign, arguably, for companies like Microsoft (Nasdaq:MSFT), Oracle (Nasdaq:ORCL), BMC (NYSE:BMC) and so on. Systems and technology (the company's hardware operations) were not so good, with constant currency growth of just 1%. Weak server sales should be a point of concern for Dell and HP followers, while the relatively solid result in storage is encouraging for EMC (NYSE:EMC) and NetApp (Nasdaq:NTAP).

Last and not least, services largely embodies the mixed quarter that IBM had. Constant currency growth of 2% was not so special, nor was backlog growth of 2%. So that may be a concern for the likes of Accenture (NYSE:ACN), Infosys (Nasdaq:INFY) and Computer Sciences (NYSE:CSC), but signings were up about 6% in constant currency and that's fairly encouraging. Of course, there is also the worry of whether IBM is at or near peak margins, and that could be a real worry for a cost-intensive service provider like Accenture.

The Profits Are Still There
Investors will be down on IBM because of this soft sales number, but the company's profitability deserves some kudos. Gross margin rose a point and a half, with strong profitability growth in the systems business. Operating income performance was likewise laudable, with 16% growth and more than a point of margin improvement.

What's the Deal with Mainframes?
Mainframes are still a meaningful business, and the 7% revenue decline here merits attention. It's very much relevant that IBM had a tough comp in this space, but the fact that mainframes were weak when the overall financial services vertical (a major buyer of mainframes) was pretty strong is a concern. The issue here is a familiar one - will the success of companies like VMware (NYSE:VMW), Citrix (Nasdaq:CTXS), Microsoft and arguably even Google (Nasdaq:GOOG) lead to a migration away from mainframes and towards virtualization that IBM cannot withstand?

More Deals - When, Not If
IBM has really recharged its growth and earnings potential with acquisitions and that is likely to continue. There are not a lot of glaring holes at IBM at this point, but a run at a company like Checkpoint (Nasdaq:CHKP), Intuit (Nasdaq:INTU), Websense (Nasdaq:WBSN) or Sourcefire (Nasdaq:FIRE) would not be so shocking. At the same time, a deal for more hardware would seem like a step away from a higher-margin, higher-cash flow profile.

The Bottom Line
If premarket indications on Tuesday are accurate, IBM stock will be more or less back where it was a quarter ago. Unfortunately it makes for a difficult buy/hold/sell call. IBM is certainly top-notch in terms of quality and can weather the ups and downs of the tech business cycle just fine. Still, at today's prices the stock is cheap enough to hold for more growth, but not really cheap enough to meet that margin of safety that investors should demand with new purchases. It's a borderline call, though, and investors who can buy today with an eye towards holding for the long term may not need to worry about that equivocal valuation so much. (For additional reading, see A Primer On Investing In The Tech Industry.)

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