IBM Is Up in the Cloud

Big Blue will expand data centers in a bid to generate more revenue from cloud computing. Amazon and Google will also fly high.

Jan 28, 2014 at 10:00AM

The transformation from hardware to software and services at century-old International Business Machines (NYSE:IBM) continues. Once famous for its personal and mainframe computers, Big Blue now wants to expand its cloud-based offerings to compliment the already strong middleware software segment and take advantage of an upward growth trend.

IBM plans to increase the number of IT data centers it operates by 60%, and it just earmarked $1.2 billion in additional spending to do it. The company has already spent $7 billion on cloud-related activities since 2007, including the acquisition of SoftLayer last year. 

The strategy is designed to revitalize the lackluster revenue growth it has produced in the recent past.The company projects annual cloud sales in the $7 billion range by 2015, up from $4.3 billion today. Investors might want to ignore the buzz and hang on a little longer to catch the benefits. 

The race is on
IBM is one of dozens of companies involved in the cloud computing segment, including fellow tech giants (NASDAQ:AMZN) and Google (NASDAQ:GOOGL). There may be room at the top for all three companies. A survey conducted last year indicated that the overall industry is likely to see growth going forward. 

Amazon also operates data centers in several regions around the world. The company wants to grow the business and expects to increase cloud revenue by nearly five times over the next six years -- a robust 29% compounded annual growth rate. This would compliment its dominant e-commerce business, which might be showing some signs of slowing down, according to one analysis. 

Amazon is a fierce competitor, no matter what it does, and it has already won a head-to-head battle with IBM. The Seattle company was selected over Big Blue to provide cloud-computing services for the Central Intelligence Agency last year.

If Amazon uses the same techniques in the cloud as it does on the ground (i.e., by expanding infrastructure and relentless customer service), the company may have a slight leg up in the race and shares may have more room to run. 

Google also is looking to compliment a market-leading business. Internet users now use Google search more than 66% of the time when trying to find information online, and the company profits mightily from it. However, indications are that growth there may be slowing. 

One way Google may diversify is by expanding its cloud-based business and partnering with other companies, since it doesn't have much experience. For example, Dell will offer the Google Cloud platform as part of its enterprise PC business.

If the cloud is as successful as search, Google stock could continue its assent, but it would probably still trail both Amazon and IBM.

Foolish conclusion
Since the industry trend is up, there could be room at the top of the cloud for tech heavyweights IBM, Amazon, and Google. 

IBM will invest more than $1 billion -- in addition to $7 billion already spent -- as part of its plan to grow cloud revenue. Patient investors will be rewarded if the company can execute, so don't bet against Big Blue, yet.

Amazon and Google are also heavily involved in the cloud, probably as a means to diversify away from successful (but slowing) signature businesses, and are likely to benefit from cloud growth.

You can profit from the cloud wars
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Mark Morelli owns shares of International Business Machines. The Motley Fool recommends and Google. The Motley Fool owns shares of, Google, and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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