| Greetings Investors, We've heard of paying up for quality, but this is getting ridiculous... In a stroke of brilliance (or perhaps desperation), software vendor Red Hat has agreed to be acquired by none other than "Big Blue" itself: IBM. The tech world was rocked by the news, and not just because of the $34 billion price tag (60%+ more than Red Hat's share price before the announcement). Industry players around the world overreacted so strongly because it shakes up the very subsectors that the software industry considers to be "the future." Former Microsoft CEO Steve Ballmer, no stranger to getting excited, simply responded, "Whoa!" upon hearing the news. Ballmer went on to qualify his amazement with, "If they're right, it's great. If they're not, it's really bad — really bad." The former Microsoft CEO and current owner of the LA Clippers has a point. No matter how you slice it, IBM is paying lots of green for Red Hat. For its fiscal year ended February 2018, Red Hat's revenues registered at $2.92 billion, which translates to a sky-high 11x acquisition price-to-sales multiple for the deal. Moving down the income statement, one raises an eyebrow further: Red Hat's net income for the year was $259 million, and free cash flow (FCF) came in around $850 million. Paying 131x trailing earnings and 40x FCF might make sense if the acquisition in question were growing at a hefty clip, but revenue growth for the year came in at just 21.7%. That's good, but it's not quite 131x earnings good. | | | 1 Tiny Change Could Create Millionaires Take a look at the top corner of your phone screen... It probably reads "4G LTE." Most phones do these days. But soon, your phone will say "5G" there instead. It might seem like a tiny change... But it actually represents what could be the most profitable advancement of the next decade. |
Throwing a "Hail Mary" In football, you throw a "Hail Mary" pass as a last resort. You're down with only seconds left on the clock. You're going to lose, so why not attempt something crazy to try to pull off a win? At the very least, you'll go down fighting. This is IBM's Hail Mary play. We all know IBM is down for the count. A quick glance at its share price (down 25% YTD), top line (down 24% over the past four years), or bottom line ($5.7 billion in profits for FY 2017 versus $13.19 billion just two years before) points to a team that sports bookies would be trying to figure out the loss point spread for. The world is shifting to the cloud, and IBM is trying desperately to get in on the action. On an investor conference call following the announcement, IBM's CEO Ginni Rometty couldn't contain her optimism, saying things like, "This is a game changer," "It's about resetting the cloud landscape," and, "We have been building our business for this moment." We couldn't help but think of Al Pacino's "One Inch" speech from Any Given Sunday. To Rometty's credit, IBM certainly had to do something. The cloud-based computer continues to boom and is projected to reach over $400 billion globally by 2020. According to a recent study by Cloud Security Alliance, Amazon's AWS is the most popular publicly available cloud platform with around 42% of the "public cloud" (as opposed to private cloud computing, which companies obviously keep internal). Microsoft, led by star CEO Satya Nadella, is gaining ground with its cloud computing platform Azure, which holds just under one-third of the market. Where does IBM fall in this "hottest" of markets? Well, let's just say it falls in the "other" category. Google has snagged just 3% of the market with its cloud platform, while IBM's SoftLayer, Rackspace, and a host of other providers divide up the rest of the market. Ouch. Which brings us to IBM's actual Hail Mary play: It wants in on Microsoft Azure's portion of the market. Moreover, it's willing to pay big bucks to get there. | | | When the Clock Strikes Midnight on Nov. 6... China Loses and YOU Are RICH And they reveal a way for any American to stake a claim and collect checks... For $2,493... $4,112... and $6,383 — every month! |
The Future is Open Source Remember how we mentioned Steve Ballmer's reaction to IBM's Red Hat acquisition? That was no accident. You see, back in 2015, the tech world was rocked by the announcement that Red Hat's Enterprise Linux (the open-source operating system) would be the preferred version of Linux for Azure customers — the same Azure we just said has about 30% of the public cloud computer market. It may surprise many to learn that despite decades of enjoying an operating system monopoly and doing everything it can to kill open-source software (Ballmer even made a point to regularly call out Red Hat in the mid-2000s for patent infringement), Microsoft has given in... and it's working! Shares are at an all-time high as the importance of Windows and MS Office continues to dwindle. In other words, it was a smart move for Microsoft to focus on becoming a major provider of cloud-computing services. And like we said: IBM wants in on that success. Moreover, it's willing to pay big bucks to get it. Good Investing, Wealth Daily Research Team | 
