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IBM Focuses on AI & Cloud, Announces Instana Acquisition

Zacks Equity Research
·4 min read

International Business Machines Corporation IBM recently announced the acquisition of Instana to boost management of applications’ performance across hybrid cloud environment and enhance its Artificial Intelligence (AI) -based automation capabilities.

Instana specializes in providing “observability” and application performance monitoring capabilities that include automated and instant instrumentation, comprehensive collection of application tracing and dependency along with relating of logs among others.

Instana’s capabilities also enable management of cloud native applications across multiple locations ranging from IBM Z, on premises, public and private clouds as well as mobile devices.

IBM stated that it will combine Instana’s offerings with the company’s AI-based automation capabilities including Watson AIOps.

International Business Machines Corporation Price and Consensus

International Business Machines Corporation Price and Consensus
International Business Machines Corporation Price and Consensus

International Business Machines Corporation price-consensus-chart | International Business Machines Corporation Quote

IBM and Instana refrained from providing the financial details of the transaction. The acquisition, subject to regulatory and customary approval, is scheduled to conclude over the next several months. Founded in 2015, Instana is a privately-held company with headquarters located in Chicago.

Instana marks IBM’s second cloud focused acquisition in a week. On Nov 16, IBM announced the acquisition of TruQua Enterprises, LLC for undisclosed sum. TruQua acquisition will aid IBM customers to deploy SAP SE SAP solutions such as S/4HANA to automate and modernize financial processes such as cash flow and budgeting.

Focus on AI-powered Automation

IBM is focused on improving its AI-powered automation offerings. As a part of this initiative, recently, the company announced several updates to its IBM Cloud Pak for Data and Cloud Pak for Automation software solutions to help clients speed up their digital transformations.

The updates to Cloud Pak for Data include addition of new accelerators for supply chain forecasting, banking and retail industries along with implementation of Watson Machine Learning Accelerator (WML-A) to manage workloads as well as streamline training models.

For Cloud Pak for Automation, IBM added the robotic process automation (RPA) functionalities it acquired with the WDG Automation purchase. The company acquired Brazil-based WDG Automation in July 2020.

Cloud Pak software solutions, which leverage the Red Hat OpenShift Platform, assist clients in deploying intelligent workflow solutions across board by providing integrated AI and data functionalities for hybrid cloud.

In May 2020, IBM had rolled out Watson AIOps, which automates the detection of IT glitches in real time by utilizing AI technology.

We believe that IBM’s initiatives to enhance AI- powered automation offerings are likely to help it add more customers and drive the top line.

Per an Allied Market Research Report, RPA market is forecast to witness a CAGR of 36.4% between 2020 and 2027. The demand for RPA has been increasing as companies look to cut costs and boost efficiency.

IBM Views Hybrid Cloud as Massive Opportunity

In addition to improving AI-powered automation offerings, IBM is growing its cloud business. The company considers hybrid cloud to have an enormous revenue-generating potential.

As a part of accelerating its hybrid cloud vision, IBM recently announced the split of its business into two separate units. The company’s legacy Managed Infrastructure Services business will be spun off into a new company by the end of 2021.

The Red Hat buyout is helping IBM boost its hybrid cloud endeavour. In third-quarter 2020, revenues from Red Hat soared 16% on a normalized basis. More than 2,600 clients are utilizing Red Hat and IBM’s hybrid cloud platform, at present.

The company is assisting business organisations to accelerate digital transformation by offering Red Hat Enterprise Linux, and hybrid cloud platform — Red Hat OpenShift. IBM had acquired Red Hat for $34 billion in 2019.

Headwinds Remain

Nonetheless, rising expenses on hybrid cloud platform amid tough competition in the cloud space from the likes of Amazon’s AMZN Amazon Web Services, Microsoft’s MSFT Azure and Alphabet’s Google Cloud is likely to limit margin expansion. 

Also, sluggish IT spending due to the ongoing coronavirus crisis led macroeconomic weakness, might negatively impact demand for IBM’s offerings, at least in the near term. 

Currently, IBM carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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