The earnings news from International Business Machines Corp. (NYSE:IBM) has been mostly glum for the past few years. But it looks like things may be changing. On last week’s third-quarter results, though, IBM stock spiked by almost 9%. It was actually the biggest one-day performance since January 21, 2009.
Yet it is still important to keep in mind that the IBM stock price today is still off more than 7% for the year so far. In fact, the shares have lost more than 20% of their value in the last five years. For the most part, the company continues to face many tough challenges, especially with its legacy technologies.
Still, I think the earnings report represents a turning point. IBM has been engaged in a multi-year restructuring and there are some encouraging signs of material progress.
Okay, then, so what are some of the key drivers? What will continue to lift the IBM stock price?
Well, let’s take a look:
IBM Stock Price Driver #1: The Cloud And Analytics
IBM has been late to strategic markets like cloud computing and analytics. Instead, other mega tech operators have been getting the lions share of the opportunity, including Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT) and SAP SE (ADR) (NYSE:SAP).
Despite all this, IBM has been making strides in catching up. During the latest quarter, cloud revenues jumped by 20% — with total annual revenues reaching nearly $16 billion.
The market definitely represents a massive opportunity. According to research from Gartner, the global spending on cloud systems is forecast to grow at an average compound annual rate of 18% to $383.5 billion by 2020. Some of the reasons include lower costs, the centralization of data and access to artificial intelligence (AI).
All of this plays to the advantages of IBM. The company has a trusted brand for mission-critical technologies, a massive global infrastructure and a set of diverse applications, such as for databases, security, middleware and analytics. Something else: IBM has a differentiated platform that integrates public, private, multi-cloud and traditional data centers that are based on a single architecture. Such things are compelling for clients.
The company has also invested heavily in AI, such as with Watson. This system is not only key for the cloud strategy but has also tapped opportunities in categories, like healthcare and financial services.
IBM Stock Price Driver#2: Revamping Existing Technologies
A big issue for IBM stock is that a huge share of revenues comes from legacy technologies. This is why sales have declined for 22 consecutive quarters.
While this is certainly a major risk factor, IBM has been aggressively retooling its systems. In fact, a big part of the strategy has been to leverage the company’s cloud technologies, analytics and AI. Such approaches are likely to add more compelling functionality as well as provide opportunities for better pricing.
There are already signs that these efforts are gaining traction. During the latest quarter, there was growth security, IoT (the Internet of Things) and even mainframes.
IBM Stock Price Driver #3: Valuation
Even with the recent run-up in IBM stock, the valuation still remains fairly reasonable. Consider that the forward price-to-earnings ratio is 11x. By comparison, SAP sports a multiple of 21x and Oracle Corporation (NYSE:ORCL) trades at 16x.
What’s more, IBM stock has an attractive yield of 3.9% at current levels. And most importantly, the company may be poised to start growing again, which should help provide for sustainable returns for the share price.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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