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Despite Fortune ranking it among some of the top tech firms, International Business Machines’ (IBM) revenues have declined for ten consecutive years. During this period, IBM’s legacy businesses struggled, and the stock looked like the definition of a value trap.
However, IBM could be on the cusp of a transformation. The spin-off of the managed infrastructure services division, a business that has weighed on results, will occur by year-end. Bulls believe that once the divestiture is complete, IBM’s cloud and block chain businesses will drive growth.
What We Need To Know About The Spin-Off
By the end of 2021, IBM will spin off a sizable portion of its managed infrastructure services business to focus on cloud computing.
Currently referred to as “NewCo,” the divested assets provided $19 billion of IBM’s $72.5 billion in revenue in FY20. However, that $19 billion is the result of lower margin, slow growth businesses, and as such, IBM will have more growth potential post-spin-off.
The Transition To Cloud
IBM bulls see the cloud as the primary catalyst to drive shares higher. As the company’s total cloud revenue jumped 19% in 2020 to $25.1 billion, that means cloud revenues could make up nearly half of total revenues post-spin-off. In addition, IBM’s cloud and cognitive software profit margins were around 80% in the last quarter.
As for IBM’s acquisition of Red Hat, which provides open-source software, it is expected to expand the firm’s reach within the hybrid cloud space. By combining private cloud with one or more public cloud services, hybrid cloud gives businesses greater control over sensitive data and provides the flexibility to move workloads between cloud solutions as needed.
Meanwhile, IBM has bolstered its position in the cloud through a slew of acquisitions. In the span of less than a year, the company snapped up Nordcloud, Expertus Technologies, Instana, MSP Taos, 7Summits, and Spanugo.
However, investors have been wondering why a company with an emphasis on cloud is lagging competitors’ growth. While IBM’s cloud revenue grew 19% in the most recent quarter, in Q4, revenues for Amazon (AMZN) Web Services jumped 28% while Microsoft’s (MSFT) Azure, Google (GOOGL), and Alibaba (BABA) grew cloud revenues by 50%, 58% and 54%, respectively.
Bulls Also Point To Blockchain
MarketsAndMarkets projects that the blockchain market will expand at a CAGR of 67.3% from 2020 through 2025, growing from $3 billion to nearly $38 billion in that timeframe.
Given that blockchain can be used for secure transactions of actual currency, the financial services industry is expected to account for the lion’s share of blockchain spending. IBM has a strong relationship with many of the largest firms in that sector, with the company’s mainframes handling around 87% of all credit card transactions and processing roughly $8 trillion in payments annually.
Based on analysis by Everest Group Research, which ranks IBM as the leader in market adoption, it is reasonable to assume IBM will garner most of the financial services industry's blockchain spend.
Wall Street’s Take
Turning to the analyst community, IBM has a Hold consensus rating, based on 2 Buys, 3 Holds and 1 Sell. At $134.80, the average analyst price target implies 1% downside potential. (See IBM stock analysis on TipRanks)
Can IBM Compete?
Even though the businesses remaining after the spin-off will generate greater growth and higher margins, IBM has an uphill climb when it comes to challenging the tech frontrunners. Skeptics see the firm’s entry into the cloud as too little too late. Bearing this in mind, the progress IBM makes towards its transformation into a cloud provider will dictate the path the stock takes.
That said, based on the amount of global cloud spending, IBM doesn’t necessarily have to dominate the industry to rake in considerable revenues.
Disclosure: Chuck Walston had a position in IBM at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.