News and Analytical survey

IBM: to change to grow!

IBM is, really, the global company. CEO Ginni Rometty said in the letter to investors that 97% of the world’s largest banks use IBM products to run their systems. The company’s products are used at 90 percent or more of airlines, insurance companies and retailers. At the moment IBM is focused to move customers to Watson and the IBM cloud.

The company’s transition has been painful, with revenues declining year after year as the company slowly increased the contribution from the high margin Software as a Service segment (SaaS). As a result IBM saw its stock decline in 2013 - 2016. However, revenues from IBM’s strategic imperatives, which include cloud, analytics, cognitive, mobile and security, increased by $8 billion in the last two years. It brought in $32,8 billion in 2016, slowing down rate of overall revenues decline, where it currently contributes 41%. Once IBM’s strategic imperatives’ contribution to account for more than half of the total, revenue will shift to positive growth.

Cloud computing is still in the early stages of growth. The Iaas+SaaS market is expected to keep growing at double-digit rates for the next several years, and IBM, Microsoft, Google and Amazon will capture most of that growth. IBM along with Microsoft and Google approximately equally divide about 20% to 25% market share in public cloud, behind 40% share for market leader Amazon Web Services (AWS).. However, IBM is the leader in the key niche of hosted private cloud. The company is focused on large enterprises looking for hybrid cloud and managed cloud services. IBM also has become extremely strong in the analytics segment with Watson in the background. Only this segment alone brought in $19.5 billion in revenues with a pretax margin of 30.5%.

With development of these strategic businesses, they will not only allow revenue to grow in the future but also will increase operating margins in the process. IBM is now trading at 14 times earnings, and it’s likely that the low valuation will continue until IBM reports flat revenue growth. This time could be a great opportunity to enter the stock. Considering the dividend yield of more than 3%, IBM is an extremely attractive and promising investment for forward-thinking investors.

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