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International Business Machines Is a Sleeping Cloud Giant

Tom Taulli

Microsoft Corporation (NASDAQ:MSFT) has demonstrated how the cloud can transform a company. During the past five years, the stock price has returned an impressive 186%. But MSFT is not the only example of this. Adobe Systems Incorporated (NASDAQ:ADBE) and SAP SE (ADR)(NYSE:SAP) have also rejuvenated their fortunes with the cloud.

OK then, so what company might be poised for a similar turnaround? I think a good choice is International Business Machines Corp. (NYSE:IBM).

Just look at the latest quarter. Cloud revenues jumped by 20% and hit $15.8 billion on an annual basis. There was also a 24% increase in the as-a-service revenues, to $9.4 billion.

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In light of these results, Wall Street certainly got excited about the growth prospects. In fact, IBM stock price spiked 9%, which was the biggest one-day performance since January 21, 2009.

When it comes to the cloud, the company really is positioned nicely to be a global leader. Here’s how CFO Martin Schroeter put it: “Keep in mind the IBM Cloud is built for the enterprise. It is the only cloud that integrates public, private, multi-cloud and traditional data centers through a single architecture and is designed for cognitive workloads.”

The company has other advantages, though, that are tough to replicate. It is the trusted brand for mission critical applications and has an expansive network of 60 data centers that span 19 countries.

To get a sense of this, look at HSBC Holdings plc (ADR)(NYSE:HSBC). The company has signed on with IBM to pull off a massive revamp of its IT infrastructure with cloud technologies. It has involved data center support for banking locations for 60 countries.

The Cloud Opportunity and IBM Stock

The cloud is far from a new thing. Keep in mind that salesforce.com, inc. (NYSE:CRM) pioneered the category nearly 20 years ago. CEO and co-founder Marc Benioff upended the traditional enterprise software market by changing the business model to subscriptions, allowing for centralized data access, and making the user interface more intuitive.

Benioff’s efforts faced lots of resistance. But over time, customers began to understand the benefits of the cloud. And for the most part, the market is at an infection point. According to IDC, the cloud software category is forecasted to grow from $78.4 billion in 2016 to a whopping $151.6 billion by 2020. This represents a nearly 18% compound annual growth rate.



In other words, there should be continued good news on IBM for sometime.

Bottom Line On IBM Stock

Besides its investments in the cloud, IBM has also been aggressive with developing Artificial Intelligence (AI) systems. At the heart of this is the Watson platform.

No doubt, the cloud and AI are highly synergistic. Let’s face it: Enterprise customers want more than just storage, tracking and monitoring. They also need technologies that help provide insights and allow for predictions. Such capabilities can substantially improve customer service, product development, and fraud detection.

Now, of course, IBM still has various challenges. The fact is that the company has many legacy technologies, especially with its software systems. Then there is the large consulting business, which has been stagnant.

But then again, IBM stock still fetches a reasonable valuation. Note that the forward price-to-earnings ratio is at 11X. By comparison, Oracle Corporation (NYSE:ORCL) is at 16X and SAP trades at 22X. IBM stock also sports an attractive dividend.

More importantly, the company has continued to innovate and focus on its core strengths. And as seen with the latest earnings report, there are already signs that the changes are taking hold.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow 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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