IBM (NYSE:IBM) is closing the books on a strong year. IBM shares have gained 21% in 2016, or about twice the gains seen in the S&P 500 market benchmark.
I have already explained why IBM investors shouldn't fear a total meltdown in 2017. Here's the other side of that story -- is IBM headed toward great results and market returns next year?
Is the never-ending makeover paying off yet?
CEO Ginni Rometty has been reshaping IBM's business model since taking office five years ago. The company has been shedding operations not closely tied to the slate of "strategic imperatives," with negative effects on IBM's reported revenues, but stable cash profits. The transformation continues to this day, as IBM continues to search for that game-changing breakthrough that makes the whole strategic makeover ordeal worthwhile.
It's fair to say that IBM's strategic-imperatives focus has gained some traction already. These operations of central importance now account for 40% of the company's trailing sales, up from 35% at the end of 2015 and 27% in 2014. If IBM had been tracking these target markets as a group in 2010, they would have amounted to just 13% of total sales.
Management describes the new IBM as a cognitive-solutions company, which is a hard shift from the old model of providing top-to-bottom computing hardware and IT services. The focus is tighter, and as a direct result, gross margins are on the rise.
The Watson system, designed to let computers answer questions posed in regular human languages such as English, is the foundation of IBM's cognitive operations today. When paired with cloud-computing concepts, Watson-powered computing tools can deliver deep-analysis results to any connected device. That includes traditional workstations, but also smaller devices such as smartphones, tablets, wearable gadgets, and embedded devices from the Internet of Things family.
These ideas may have sounded crazy five years ago, but it is becoming obvious that IBM chose the correct way forward. Big Blue hopes to become the very heart of the burgeoning Internet of Things megatrend, while also turning traditional business-grade data analysis on its head.
So yeah, I would say that IBM's makeover has started to pay dividends. There's still more work to do, but the company is going places. So is the stock.
Is this the right time for a sudden surge?
In all fairness, it would be extremely difficult for any year to count as the best in IBM's centennial history. The company has survived world wars, technological paradigm shifts, and every recession along the way, only to remain one of the world's largest and most important information businesses.
On the flip side, Big Blue has also seen its fair share of positive shocks. It invented the mainframe computer and the modern PC, led the way in technologies for speech recognition and data storage, has produced more patents than anyone else in each of the last 23 years, and much more. I don't mean to sound like a promotional tape from IBM itself, but it's a darn impressive business record. And IBM's stock has enjoyed top-shelf surges to match that record.
Three times in the last 15 years alone, IBM shares have surged at least 25% higher from one New Year's holiday to the next. 2016 will probably fall a little bit short of that target, currently tracking 21% higher year to date.
But Rometty has built a lean, mean cash machine here. Investors and analysts started to take notice in 2016, and the same foundation will support the business in 2017, as well. Big Blue wants the Internet of Things to go mainstream in a big way, reaping the business rewards of collecting and analyzing the surging data streams from billions of consumer-facing devices.
If 2017 turns out to be the hockey-stick moment for that multi-industry trend, then IBM and its share prices should follow suit. As a shareholder myself, I could live with another couple of years at lower prices so that the reinvested dividends can buy more stock at lower prices, but I'll also cheer when the big breakthrough finally arrives.
2017 could be that year. Don't hold your breath waiting for the surge, because trying to time business events is an unpredictable hobby. But you don't want to be left on the sidelines when the big day arrives, so this would be a great time to stake out your first IBM investment.