, agreed that having a strong services business helps IBM sell everything from servers and storage to new software. Software and services are very complementary, he said.

Big Blue announced four software acquisitions in the fourth quarter and analysts said the companies were all strong complements for IBM's Tivoli systems management software and WebSphere e-business applications.
They've made some key acquisitions in the last year, and they're not overspending on them, said Christopher. They're buying companies with established businesses that aren't too big, but that can grow.

Ben Reitzes, an analyst with UBS, recently upgraded the company to buy based on the belief that solid software revenue will lead to much higher earnings in 2007. And he thinks software is going to be a much bigger revenue source, up from slightly less than 20 percent of sales now.
Investors like the software business since it is far more profitable than other areas of the company.

In the third quarter, IBM reported gross profit margins (which measure profits after subtracting the cost of sales) of 85 percent for software, compared to a gross margin of 28 percent for the services division.
But can software drive the kind of growth the company needs to offset potential weakness in services? One analyst isn't so sure.

Software's just a smaller division, so it's going to have a lot less impact than the global services, which accounts for half of all sales, said Rich Williams, an analyst with ICAP. If global services has a bad quarter, it's going to take amazing results elsewhere to offset it. It all really comes down to services now.

That would be a slowdown from the 13 percent earnings growth IBM is expected to report for 2006 - potentially not a good sign for investors considering the stock's recent rally. Williams added that investors need to see a pickup in services demand for the stock to keep climbing higher.
[IBM is] showing decent earnings growth, but a lot of that is cost-cutting that's been going on for a while, and people begin to wonder where the limits of that are, he said.

Investors want to see continued strong revenue growth in services.
But IBM is trading at 15 times 2007 earnings estimates, a lower valuation than rivals in any of its major categories. Accenture and EDS each trade at 19 times 2007 earnings projections.

Hardware competitors ( ) and ( ) trade at P/Es of 16 and 18. And software rivals ( ) and ( ) are valued at 17 times and 25 times earnings estimates for this year.

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Of course, if the economy slows more than expected, IBM could be hit hard by a pullback in corporate tech spending. But so would every other software and hardware company catering to big businesses.
IBM's focus on higher-margin markets like services and software, as well as a strong presence outside of the U.

S., could soften the blow of any U.S.

weakness. More than half of IBM's total sales come from outside the Americas.
Internationally, they're extremely strong - they're viewed as the gold standard, said Crowell, Weedon's Christopher.

And with IBM trading at a discount to all of its top competitors, you could say the same about the stock.
None of the analysts quoted in this story own shares of IBM. None of the firms have an investment banking relationship with the company.