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Panos Mourdoukoutas
Panos Mourdoukoutas
Articles (101) 

IBM's Hopes Are in the Cloud

IBM's hopes for a revenue rebound in 2021 are with its hybrid cloud and AI

IBM's (IBM) hopes for a revenue rebound in 2021, which is intrinsically tied to its hybrid cloud and AI, according to a statement by its chairman Arvind Krishna:

"We made progress in 2020, growing our hybrid cloud platform as the foundation for our clients' digital transformations while dealing with the broader uncertainty of the macro environment. The actions we are taking to focus on hybrid cloud and AI will take hold, giving us the confidence we can achieve revenue growth in 2021."

Krishna's statement followed Big Blue's 2020 fourth-quarter and full-year results, which showed a 4.6% revenue decline in 2020, underlining its chronic revenue decline problem and lackluster Wall Street performance.

The IT giant's shares have been heading south since 2013, ranking at the bottom of Dow Jones components. Apparently, investors have been looking for better opportunities in the IT sector, to companies with positive economic profit.

Economic profit, calculated as return on invested capital (ROIC) minus weighted average cost of capital (WACC) is a measure of how effectively a company manages capital to deliver superior returns to its holders and an indicator of the strength of the company's competitive advantage. A negative economic profit means that the company destroys value as it grows and that its competitive advantage is eroding by competition or market saturation.

Company

ROIC

WACC

Economic Profit (ROIC-WACC)

Amazon

11.37%

7.97%

3.41%

Microsoft

28.10%

5.89%

22.21%

Google

20.93%

7.26%

13.67%

IBM

5.64%

5.82%

-0.18%

Source: Compiled from Gurufocus on January 23, 2021

To turn revenues around, IBM's previous and current leadership have launched a radical restructuring of the company, shedding mature, slow-growing technology businesses and replacing them with emerging high-growth areas like the "hybrid" multi-cloud market. That's a computing environment that combines multiple cloud providers and clouds, a $91.74 billion industry according to Statista.

IBM's strategy is based on the premise that corporate clients view the cloud opportunity as incorporating their on-premises facilities, private clouds and public clouds.

To speed up corporate restructuring, the technology giant paid big bucks to acquire Red Hat a couple of years ago. The open-source technology company provided IBM with an innovative hybrid cloud platform and a vast open-source developer community.

Still, corporate restructurings are a slow and painful process. Usually, things turn worse before they get better, as the new businesses do not grow fast enough to make it up for the lost revenue and profits in the old businesses. While IBM has made good progress in its foray into the cloud business, it lags behind the early movers and the giants like Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT) and Alphabet's Google (NASDAQ:GOOG)(NASDAQ:GOOGL).

The Covid-19 pandemic has compounded IBM's restructuring problems by hurting its legacy business, as corporate clients cut down spending on hardware and operations.

Big Blue reported fourth-quarter revenues from its Systems (includes Systems Hardware and Operating Systems Software) segment of $2.5 billion, down 17.8% (19.4% adjusting for currency) from a year earlier due to declines in all Systems Hardware platforms.

While it's still unclear whether IBM's bet on cloud and AI will pay off, one thing is clear: Wall Street is looking elsewhere in the IT space for profitable opportunities.

Disclosure: I don't own shares of IBM

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About the author:

Panos Mourdoukoutas
I’m a Professor of Economics at LIU Post in New York. I also teach at Columbia University. I’ve published several articles in professional journals and magazines, including Forbes, Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance.

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