International Business Machines or IBM (NYSE:IBM) has had a strong presence in the market for over 100 years now. However, the 21st century brought with it a lot of changes, including a large shift toward cloud computing and software. This has caused a corresponding shift away from hardware and physical networks, the market in which IBM has dominated for decades.
The cloud market, for example, is one of the fastest growing markets in the technology sector today. Analysts expect that within the next six years, it will be a $200 billion a year market. Needless to say, the competition is stiffening as more and more try to secure their share of that potential pie. So the important question for IBM now is whether or not it has the foresight and ability to look toward the future and shift with the market into these emerging sectors.
IBM and cloud services
- Warning! GuruFocus has detected 4 Warning Signs with IBM. Click here to check it out.
- IBM 15-Year Financial Data
- The intrinsic value of IBM
- Peter Lynch Chart of IBM
As part of a larger plan to bolster its cloud service offerings, IBM bought SoftLayer Technologies, Inc last year for a cool $2 billion. The company plans to integrate its current cloud business with the platform it has acquired with SoftLayer Technologies. With this new deal, it will be able to expand further into the market than it has so far ventured.
In addition to this purchase, IBM has announced intentions to invest $1.2 billion in the development and expansion of its cloud services over the next year. This investment, together with the acquisition of SoftLayer Technologies will help to boost the number of data centers IBM own to 40 location in approximately 13 different countries, allowing for significantly greater global coverage.
Restructuring for the future
This strategy to expand its cloud services in order to stay ahead of its younger, but perhaps better equipped, competitors like Amazon (NASDAQ:AMZN) goes beyond investments and new acquisitions. IBM has strategically located its new centers in places like Mexico, India, Hong Kong, and China in order to tackle emerging world markets before anyone else gets there.
It also has its sights set on winning as many of the much coveted government contracts as all the branches begin to switch to cloud computing. Last August, it already secured a $1 billion contract with the US Department of Interior.
One of the pressing questions from stockholders and prospective investors, however, is how the company plans to pay for the large investments and purchases required for IBM to establish itself as a cloud service provider. The answer comes, in part, from a Chinese firm, Lenovo, which has confirmed a deal between the two companies for the sale of IBM’s declining server division. Lenovo will purchase the division for a total of about $2.3 billion which will help to cover a substantial amount of IBM’s planned investments.
This sale, along with many other changes to its business strategy and focus, will allow IBM to scale down and direct its assets into its more profitable and promising divisions. It will also save the company a healthy amount in business costs as the hardware operations had been dragging down IBM’s revenue.
IBM recently reported that it has already seen $1 billion in sales from its cloud services division last year so once these future plans for expansion start to be felt, we can expect to see even more growth in the coming years. This has all been welcome news showing investors that IBM has every intention of adapting and growing with the changing markets of the 21st century.
Although it hit its 52 week-low of $172.19 a few short months ago, the company appears ready to take on the new year and surpass the market’s expectations and it’s already beginning to bounce back although it still has a long road ahead of it before the stock reaches its high of $215.90.
But with so much to look forward to in the future, investors would be smart to buy now while the stock is still nearer to its low in order to maximize returns as much as possible from the growth we can expect to see over the next few years.