International Business Machines Corp. (IBM, Financial) is trying to get its business strategy right: focus on the fast-growing cloud and artificail intelligence segments of the information technology industry and catch up with the likes of Amazon (AMZN, Financial), Alphabet's Google (GOOG, Financial) and Microsoft (MSFT, Financial).
On Thursday, IBM announced that it will split itself into two publicly traded companies, one of which will keep legacy IT infrastructure businesses, while the other will keep cloud services and AI.
The company's move is part of a broader strategy of "creative destruction," where the technology giant has been shedding declining traditional business segments and expanding into emerging, high-growth areas like the "hybrid" multi-cloud market. That's a computing environment that combines multiple cloud providers and clouds—public, private and software as a service.
IBM estimates this maket will be worth $1 trillion by 2021, while Statista expects it to be a fraction of that at $91.74 billion.
That's why the technology giant paid big bucks to acquire Red Hat last year. The open-source technology company provided IBM with an innovative hybrid cloud platform and a vast open-source developer community.
IBM's aggressive expansion into the hybrid cloud comes at a time the company is trying to reverse a prolonged decline in revenue and profit margins that has investors fleeing its stock. But all these moves could do too little to help IBM catch up with industry leaders. The IT industry is conducive to economies of networking—the benefits associated with a large base of users—which favor first-movers like Amazon, Google and Microsoft.
That could, perhaps, explain why IBM has been doing a poor job in managing capital (see table) and Wall Street's skepticism. A rally following IBM's announcement to split itself into two pieces faded by the end of the trading day.
| Company | ROIC | WACC | Excess return (ROIC-WACC) |
| Amazon | 10.01% | 8.35% | 1.67% |
| Microsoft | 26.75% | 5.81% | 20.94% |
| 20.93% | 7.26% | 13.67% | |
| IBM | 7.32% | 5.90% | 1.42% |
Source: Compiled from GuruFocus on Oct. 9, 2020.
Apparently, IBM has to go long way to convince investors that it will turn to the industry leader once it was, churning out one breakthrough product after another, like the PC back in the 1980s. But that's when its leaders, complacent with success, committed a series of strategic mistakes, like the outsourcing of software to Microsoft and hardware to Intel (INTC, Financial).
Disclosure: I own shares of Microsoft, Amazon and Alphabet.
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