IBM Rockets the Dow Higher in Monday Trading

As it prepares for its annual meeting on Wednesday, IBM is making a public relations push -- and the market likes what it sees

May 12, 2014 at 1:00PM
Take The Long View

The Dow Jones Industrial Average (DJINDICES:^DJI) had moved 91 points higher by 1 p.m. EDT, reaching an intraday record high amid broad-based buying. 

IBM (NYSE:IBM), the second-highest weighted stock in the Dow, was up 1.3%, among the largest blue-chip gainers by early afternoon. This move comes in front of the company's annual meeting this Wednesday and on the heels of a New York Times interview with CEO Ginni Rometty over the weekend.

Where's the growth?
IBM's growth has been the biggest concern for the investors over the past few years. Rometty specifically address this concern in her interview with the Times. To paraphrase, in the short term the CEO cares a whole lot more about profit than she does growth.

This chart clearly supports her statement.

IBM Revenue (Annual) Chart

IBM Revenue (Annual) data by YCharts.

But to focus on the short term is a mistake, and Rometty made that clear. IBM is once again transforming itself -- which is something of an ongoing tradition at the 100-year-old company.

Her decisions today are not about this quarter or even this year, but about the next decade, and maybe even longer than that. And in this way the decline in revenue has been a short-term symptom of the company's long-term strategy.

Since Rometty became CEO, IBM has sold businesses with combined annual revenue of over $6 billion annually. No matter how you slice it, that's a major hit to the top line -- even if it's on purpose!

However, these sales have generated over $16 billion in cash, which Rometty is investing in the future of the company. That's the real narrative IBM investors should be watching.

The IBM of the future
Gone are the days of the narrow-margin hardware businesses at IBM. Rometty is betting the future of the company on higher-margin software and service businesses.

The company is investing heavily in cloud technologies, with a stated goal to have 40 cloud data centers running in 15 countries by the end of 2014. IBM invested $1.2 billion to the project in January, only seven months after its $2 billion purchase of cloud tech start-up SoftLayer Technologies.

And of course there is Watson, IBM's supercomputer and software system made famous by its dominant performance on the game show Jeopardy. Watson's potential is far greater than trivia, of course, with potentially revolutionary applications in science, medicine, finance, and more.

Taking a step back, we can see the outline of IBM's long-term strategy. The company wants to enable a future of cloud-based technologies that drive the world around us. That technology collects an incomprehensible amount of data -- data that could be used to optimize and improve facets of life from air travel to oil pipelines to the temperature in your living room. That's a task that software like Watson would be perfectly suited to manage. 

It's about building better systems with better data, and then using that data to make the world an even better place.

This transformation will be the focal message at IBM's annual meeting this week. Investing in a company that is in the middle of a major strategic change is a risky proposition -- but it could also present an opportunity to buy an incredible company on the cheap.

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Jay Jenkins has no position in any stocks mentioned. The Motley Fool owns shares of 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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