Will IBM Thrive in the Cloud Computing Space?

Although the stock of International Business Machines (NYSE: IBM) is trading higher by approximately 12.5 percent on a year-to-date basis, the past 5 years have been disappointing for investors. The shares of IBM have slumped by around 10 percent within that period, in comparison to a 77 percent gain for the broader S&P 500 index.

Currently, IBM is facing the difficulty of transforming into a firm that can serve as a major player in the cloud computing industry. Revenue and profits have been declining, triggered by drops in legacy businesses. Now, investors are wondering if the long-term strategy of IBM is effective and if it can ultimately recover.

The revenue of the tech giant has dipped year-over-year for 17 consecutive quarters. The downward movements have been small, adjusting for divestitures and currency factors. Although there are some units of IBM that are fast growing, the ongoing deterioration of legacy businesses is putting pressure on the sales.

Profits are also declining and IBM anticipates to generate an adjusted earnings per share of at least $13.50 this 2016, down from the previous year’s $14.92 and 2014’s adjusted earnings per share of $16.53. Tumbling sales data in legacy businesses and investments undertaken in growth areas such as cloud computing can be considered as a catalyst for the downturn in the profitability of IBM.

Meanwhile, the strategic imperatives of IBM is now responsible for 38 percent of the overall revenue and although there has been sluggish growth, the businesses still managed to experience revenue growth of 12 percent on a year-over-year basis during the second quarter. Additionally, the overall revenue in the cloud sector rallied by 30 percent, while the annual run rate for cloud-delivered-as-a-service surged by 50 percent to reach $6.7 billion. The company provides platform-as-a-service through Bluemix and infrastructure-as-a-service through SoftLayer. Much of IBM’s software is currently offered as a service.

Despite all these, the mentioned growth has not been sufficient for IBM to counter the softness in other areas of its business. The positive news for investors is that the strategy of the tech company can be considered reasonable.

The cloud strategy of IBM is strikingly different from that of Amazon Web Services. While Amazon.com intends to be the cheapest provider, IBM is not interested to compete in markets where price is the only substantial differentiating aspect. Rather, the tech giant aims to deliver products and services of high value to enterprise clients.

IBM’s Watson can be regarded as the most high-profile cloud service provided by the company. However, it expects that Watson will become a major business in the long-term, as it is being utilized in a broad range of industries and is accessible in the form of various services on the cloud platforms of the company.

Although the financial results of IBM will continue to be lackluster in the short-term, investors should note that the transformations that the company  is going through is not quick and easy and that it is actually on the right track.

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