IBM’s (IBM, Financial) transformation has been on a never-ending journey, which has resulted in its stock price going on a steep downward slide since 2013. But the stock has been in recovery mode since the start of the year, posting a near-23% return in the last 12 months. One of the primary reasons for the recovery was that the pace of revenue decline has slowed down in the last four quarters as contributions from their strategic imperative, the new group of business lines on which IBM is pinning all its hopes, have been on the rise.
Although there are plenty of analysts who have written off "Big Blue," saying that the company will never recover and that its glory days are over, it is hard to miss the fact that their new businesses are showing strong growth. Take their as-a-service unit, for example: in the last three quarters, the company’s as-a-service run rate has moved from $5.4 billion to $7.5 billion. The cloud unit has posted 46%, 50% and 65% year over year growth in the first three quarters of the current fiscal.
How does that compare with the growth of the cloud businesses of its rivals?Ă‚
The top 3 cloud infrastructure companies in the world
Microsoft’s (MSFT, Financial) and Amazon’s (AMZN, Financial) growth rates in cloud infrastructure have been topping 50% during the same period, which means IBM has managed to keep up with its new-age competitors. Not bad for a company that many thought was fading away. IBM has, from the start, focused its efforts on the hybrid cloud model. Even though the jury is still out on whether that is the best direction for them, nothing is going to stop IBM’s IaaS offering - SoftLayer - from competing with Microsoft Azure and Amazon AWS.
The issue with IBM
Admittedly, IBM has been a bit slow and more reactive rather than proactive to developments in the cloud infrastructure industry despite being one of the earliest proponents of cloud. When compared to Amazon, who keeps launching new services at an alarming rate, any company would seem to lack the energy that Amazon possesses. Their AWS re:Invent conference keeps repeating the same pattern: the launch of myriad services. One of the primary reasons Amazon’s total revenue keeps growing at a fast pace while the company continues cutting back on its pricing (Amazon has slashed AWS pricing by more than 50 times since launch) is because it keeps adding more and more services to its stack.
IBM does lack the kind of messaging power that says its cloud offering is the best and that it stays on the leading edge of innovation. This is possibly one reason why we do not talk about IBM SoftLayer in the same regard as Microsoft Azure or Amazon’s EC2. But fortunately for the company, that has not stopped it from growing. Their cloud business has been clocking a 50%-plus growth rate over the past several quarters.
Increasing competition in cloud infrastructure
The industry is still young and there is plenty more room to grow, but competition has increased manifold in the last year with Google (GOOG, Financial) and Oracle (ORCL, Financial) throwing their hats into the ring. The problem for Google is their own need. Their current infrastructure has possibly been stretched to its limit as the company needs to keep tracking information on the web, which keeps expanding on a daily basis. Oracle has no choice but to be in the cloud game because their database expertise will not save them if everybody moves into their competitors’ cloud. But both companies will need time to establish their data center networks. Though money will not be an issue for either of them, time will be.
IBM, Microsoft and Amazon already have a huge lead over Google and Oracle, and if they can further increase the gap over the next year it will become even more difficult for the latter two to catch up. The speed at which IBM is able to move in the next year will be extremely critical for the company’s future. If they can continue to keep pace with Microsoft and Amazon, then it will be difficult to push it out of the competition.
The investment angle
From an investor’s standpoint, this is the right time to get on the Big Blue Express. Their new business lines are growing and the decline in legacy businesses is slowing down. Very soon - within a few quarters - I expect them to return to growth. After that there is no turning back. They are already the leader in the analytics space with little to no competition and a leader in the hybrid cloud model. Their enterprise relationships are intact and they will leverage that to grow their analytics and cloud revenues to greater heights. What is not to like?
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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