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IBM's Investments and Move to Higher-Growth Business Make It a Smart Choice

August 20, 2014 | About:



IBM (IBM) is transitioning its business to key growth areas and is also transforming parts of its business through an investment of $1.2 billion. Further, a solid profit margin of 16.02% and a decent forward P/E of 9.18 indicate that there can be a lot of opportunities for investors to profit from IBM going forward. However, the company might face challenges to hold a competitive profit margin as it is expecting stiff conditions in its hardware business. Also, the negative impact of currency fluctuations cannot be neglected.

How the road ahead looks like

IBM is seeing demand growth in key areas such as mobile, cloud and security. However, IBM has also made solid moves to support its cloud services. It has made significant investments to expand its soft layer cloud hubs. Also, it has launched BlueMix, which is its new platform as a service to speed up the deployment of Hybrid Clouds. IBM will also benefit from acquisitions that it has made in the past, with some big names such as Aspera and Cloudant. This justified IBM’s vision to extend its capabilities in big data and cloud.

Moving on to its hardware segment, the company is having a tough time as it is facing a lot of challenges. It is facing challenges in power, storage and System X. Further, IBM is taking some strong steps to get over this weakness and maintain profitability even in such an unfavorable situation. IBM is selling its industry standard server business to Lenovo. Besides this, IBM is also taking portfolio actions to divest businesses that are no longer fitting in its strategic profile.

For example, IBM is selling its customer care BPO business. On the other hand, the software segment of the company has remained strong on the back of good traction in other regions such as in Latin America, which was purely led by Brazil. As a result of this, the EMEA improved by 1%, which also became a key factor for growth in Japan where the company saw revenue growth.

IBM also saw some weakness in China. Its growth markets were not impressive and were down by 5%. But Asia-Pacific was the region where its business was severely affected. IBM expects these conditions to continue, as it is facing challenges in growth markets. On the other hand, the company is also optimistic about its long-term growth as it is making significant investments in key markets to capture the growing opportunities.


Moving ahead, IBM is now shifting its spending toward more profitable ventures. It is aggressively investing $1.5 billion in research to explore new ventures. This clearly indicates that the company is robust in search of priorities where it sees growth opportunities. If we talk about its segments, though, Global Technology service revenue was down by 3%, but on a constant currency basis, it was up by 2%.

The SoftLayer segment within GTS performed well. This platform provides a highly differentiated solution for clients looking to deploy across public, private, or hybrid clouds, unified on one platform.

Seeing this success, IBM will have cloud centers in every major geography and key financial center. It is planning to double its SoftLayer centers with 40 cloud datacenters in 15 countries. Moving forward, IBM is seeing good traction in front-office transformations, as it was ranked number one in Overall Business Consulting and Cloud Professional Services by IDC, and number one in Mobility Consulting Services by Forrester, which is a great achievement for it.


To get over its weakness, IBM is focusing on allocating capital efficiently and effectively, which means investing in the right places as well as moving away from areas that don’t support its shift to higher value. This is an important part of IBM’s model, which can deliver good growth in the long run. Hence, as the company's outlook looks impressive, it can be a good buy for the long run.

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