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IBM is really hoping the Red Hat acquisition pays off: analyst

Ashley Nelson

IBM reported another disappointing quarter Thursday.

Wall Street’s estimates put IBM’s (IBM) revenue at $18.22 billion and earnings at $2.66 a share. IBM reported revenue of $18.03 billion and beat estimates on earnings with $2.68 a share. This was another disappointing quarter for IBM despite an earnings beat. IBM’s stock had dipped as much as 6%, showing Wall Street’s wariness of the computer hardware company, but one analyst is not giving up on the company just yet.

“They delivered at the top end of their earnings guidance. Their full-year's earnings guidance looks solid. The strategy, the acquisition of Red Hat, is showing promise,” Daniel Newman, principal analyst of Futurum Research, told Yahoo Finance, adding that Red Hat delivered 20% growth in revenue in the third quarter. “So that's really promising, you know, you're seeing the company make certain investments in areas like quantum computing, artificial intelligence. We're seeing blockchain. And these are things that have a bit of a longer window.”

Newman is pegging the long-term success to the $34 billion acquisition of the cloud tech company, Red Hat, that was finalized in July. The purchase positions IBM as a competitor with the likes of Google, Microsoft, and Amazon, all companies that have invested heavily in cloud technology.

“Red Hat wasn't just about the current business. As you know, it was only about a $3.4 billion run rate, and they paid $34 billion for it,” he said. “But what it did is it enabled IBM to really play in this rapidly growing hybrid cloud space,” Newman said. “We're moving into a business where [Amazon’s] AWS and [Microsoft’s] Azure, Google Cloud Platform, IBM needs to be able to compete, and IBM cloud itself wasn't competing. But because of where the enterprise is heading and the type of investments that enterprises are making, IBM with Red Hat can finally put together a solution, a set of solutions that they can compete in the market.”

Wall Street is also eyeing IBM’s CEO Ginni Rometty very closely. Since she took the reins in 2012, IBM’s market cap has dwindled from $214 billion to around $126 billion, and Newman says the Red Hat acquisition could be her and the company’s saving grace.

“Red Hat was the big bet, and Ginni's definitely being watched very closely to see how does Red Hat wind up performing,” Newman said. “Cloud grew 14% this quarter, $5 billion in revenue. I think they claim that was third only behind AWS and Azure, which is promising. But it needs to do better, and IBM cloud has been in the background for a period of time now. And Red Hat is really the add-on that they needed to compete in the space where enterprises are heading.”

Ashley is a Production Assistant for Yahoo Finance. Follow her on Twitter @actuallynelson.

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