Much has been made of IBM's (NYSE:IBM) transformation to focus on what it calls its "strategic imperatives" businesses: cognitive computing analytics, the cloud, data security, social, and mobile applications.
That shift in its business model is why IBM has experienced years of quarterly total revenue declines. Such drastic changes require time to take hold, especially for a company of this size. And as IBM demonstrated with the unveiling of its growing Q Network, it continues to tackle futuristic technology.
Jetsons, here we come
Today's computers store and process data based on a series of bits, each with a value of either 1 or 0. But quantum computers, which were just theoretical until recently, process data using qubits, in which can represent both a 1 and a 0 at the same time, and all the states in between. The result is a computer able to provide solutions to enormously complex problems at speeds previously unheard of.
IBM has been exploring quantum computing for a while, but it wasn't quite ready to introduce it to the world -- until now. The Q Network has not only forged numerous partnerships to explore its quantum computing capabilities, it has signed some of the world's leading institutions as clients.
JPMorgan will work with IBM scientists directly and utilizing cloud-accessible, open-source developer tools to explore financial-related applications such as risk analysis. Tech leader Samsung wants to determine how quantum computing can enhance its semiconductor design and manufacturing.
German automotive giant Daimler AG sees quantum computing as having potential in routing fleets of autonomous cars, as well as a tool that can lead it to improved manufacturing. The commercial introduction of IBM's 20 qubit cloud-based quantum computer is a win in and of itself. From an investor's perspective, even more intriguing are the multiple industries IBM's new clients hail from.
There are nearly unlimited applications for a tool with the expected power of quantum computing, which gives IBM an wide audience of potential customers. It's not hard to imagine clients signing on for its cloud, quantum computing, analytics, and data security offerings as a package.
The inroads it is making in quantum computing should eventually give IBM's already-growing strategic imperatives business a boost. But the market remains focused on total revenue rather than strategic imperatives results, which helps explain why IBM stock is trading at a meager 10.8 times forward earnings.
Though last quarter's $19.2 billion in total revenue was flat, the $8.8 billion in combined strategic imperatives sales was an 11% jump compared to a year ago. Nearly half of IBM's core-segments revenue -- $4.1 billion to be precise -- came from its soaring cloud sales. IBM now boasts a cloud annual revenue run-rate of $15.8 billion, up 25% year over year.
One of the few providers generating more cloud revenue than IBM is its longtime partner and competitor, Microsoft (NASDAQ:MSFT). With an annual cloud run-rate of $20.4 billion, Microsoft is as focused as IBM in growing market share. Microsoft also hopes to get a cloud boost from quantum computing. However, unlike IBM, Microsoft's venture into the technology isn't ready for commercial use.
Another thing the two tech mainstays have in common are their respective efforts to grow cloud sales by focusing on software as a service (SaaS). Most pundits agree software and service solutions delivered via the cloud offer the most upside to providers. Nearly two-thirds of IBM's trailing 12-month cloud revenue -- $9.4 billion -- was service-related.
IBM CEO Ginni Rometty is also paring overhead. Though its spending was flat last quarter, her company has shaved 8% off its total expenses in 2017. The good news is cutting costs clearly hasn't hindered IBM's research and development efforts.
Considering its low valuation, growth where it counts, an industry-leading 3.9% dividend yield, and an unmatched suite of cutting-edge solutions, both value and income investors should give IBM a long look.