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IBM Ships First z14 Mainframe, Data Encryption in Focus

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International Business Machines Corp. (IBM - Free Report) recently shipped its first z14 mainframe from its Poughkeepsie factory based in New York. This model was unveiled in July 2017 when its entire series of mainframes were renamed as IBM Z.

Per IBM, the most prominent feature of the newest member of the series is 100% data encryption, ensuring high security. Other key features include real time insights that are beneficial for machine learning and a strong cloud platform. The system is also compatible with blockchain technology.

IBM z14 can support 12 billion encrypted transactions each day, almost equivalent to 400 Cyber Mondays. With this specification, the company believes that the new mainframe will find widespread acceptance in the financial, government, retail, travel and transport industries, where the number of transactions is much higher and data safety necessary.

Shares of IBM have lost 9.5% year to date, underperforming the industry’s decline of 8.8%. We believe, with the recent advancements made by IBM in cloud, blockchain and its artificial intelligence platform Watson, the launch of a mainframe compatible with all the three segments is a positive for the company. These will help shares rebound going forward.

Evolution of Mainframe

Mainframe computers were primarily meant for huge amount of critical data processing for large organizations. With the evolution of technology mainframes, the underlying infrastructure was also upgraded. Though public, private and hybrid clouds have become popular; these huge computers are still in demand for their capability of handling high workloads and the fact that it can be integrated into an existing ecosystem.

IBM almost had a monopoly in the mainframe segment for quite some time. Though IBM still dominates the market, other players like Fujitsu and Unisys (UIS - Free Report) have entered the fray. Mainframes have an intrinsic role in the digital transformation of enterprises, more so because of their high computing power.

Effect of Mainframe Segment on IBM’s Financials

In a recent report by Gartner, the CPU segment mostly comprised of mainframes witnessed year-over-year decline of 29.5% in the second quarter of 2017.

However, IBM’s management expects the shipments of z14 mainframes to have a positive impact on second-half 2017 results. This is anticipated to have a positive impact on overall revenues generated by the mainframe market.

ZDNet quoted Ross Mauri, general manager of IBM Z, who said that IBM adds around 5 o 15 customers in this segment per quarter. Per IBM, z14, which has been co-designed with clients’ insights, is expected to witness high adoption rate.

We believe that with the impending implementation of Europe’s General Data Protection Regulation (GDPR) in May 2018, the shipment of z14, whose core advertising point is data encryption, is perfectly timed.

Zacks Rank and Key Picks

IBM currently has a Zacks Rank #3 (Hold).

Better-ranked stocks in the broader industry include Lam Research Corporation (LRCX - Free Report) and Applied Materials, Inc. (AMAT - Free Report) , both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term earnings growth rate for Lam Research and Applied Materials is projected to be 17.2% and 17.1%, respectively.

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