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IBM Hits the Ground Running in 2019

By Timothy Green - Updated Apr 15, 2019 at 11:20PM

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A tough 2018 is officially in the books.

International Business Machines ( IBM -0.49% ) had a rough 2018. Revenue grew during the first half of the year, but weakness in legacy software and unfavorable currency fluctuations led to a revenue decline in the third quarter. The market punished the stock, reducing the value of the century-old tech company by about 25%. Most of that decline came during the brutal stock market sell-off that began in October.

There's no telling what IBM stock will do this year. The company, though, will continue to invest in growth areas like cloud computing and analytics, push bleeding-edge technologies like quantum computing, and leverage its long-standing customer relationships. In the first week or so of the new year, IBM has already taken meaningful steps in each of those areas.

IBM's Global Center for Watson IoT in Munich, Germany.

Image source: IBM.

A $540 million bank deal

IBM is deeply entrenched in the financial services industry. The company's mainframe systems are in heavy use at banks around the world, and that's unlikely to change anytime soon given the immense switching costs involved.

Denmark's Nordea Bank is the latest financial institution to expand its relationship with IBM. The bank already uses IBM's mainframe systems, and it now plans to outsource its mainframe operations to IBM as part of a managed services agreement. The multiyear, $540 million deal is the latest development in a 15-year relationship between the two companies.

Large deals like this are routine for IBM. With around $80 billion of annual revenue, the Nordea deal won't move the needle on its own. But it does demonstrate the value of the relationships IBM has built over the years. Despite its so-so results and struggling stock, the company has staying power.

More accurate weather forecasts

IBM acquired most of the assets of The Weather Company back in 2015. The deal gave IBM data, and lots of it. In addition to a popular website and mobile app, The Weather Company provides solutions to industries that benefit from timely and accurate weather forecasts. Retailers, for example, can use The Weather Company's data to adjust staffing and predict demand of products based on the weather.

The IBM Global High-Resolution Atmospheric Forecasting System, announced at CES, increases the forecasting resolution by nearly 200% in areas of the world that are typically stuck with infrequently updating, low-resolution forecasts. The system runs on IBM's POWER9 systems, which are built for high data throughput, and it uses crowdsourced data from millions of sensors, as well as sensor readings from aircraft.

Buying The Weather Company may have seemed like an odd move at the time, but it was part of IBM's bet on data and analytics. A more accurate forecasting system should help drive analytics revenue higher in the coming years.

A commercial quantum computer

Quantum computing is a technology that is likely still years, or even decades, away from meaningful commercial applications. Unlike a traditional computer, where each bit can be in one of two states, a quantum computer is comprised of qubits that are in some combination of two states at any given time. This fuzziness opens the door to ultra-fast computing in certain scenarios, but it also introduces a bunch of problems that make the technology error-prone and difficult to tame.

IBM is one of the leaders in quantum computing. Companies are already using IBM's quantum computing systems to experiment in areas including asset pricing, quantum chemistry, and fleet logistics. Big Blue took another step forward earlier this week, announcing at CES the IBM Q System One. The company is calling it the "first integrated universal approximate quantum computing system designed for scientific and commercial use."

The IBM Q System One quantum computing system.

The IBM Q System One quantum computing system. Image source: IBM.

The IBM Q System One is built for stability and reliability, allowing for continuous commercial use and operation outside the research lab. It also sports a sleek design, making it look the part as a computer of the future. In addition to this new system, IBM plans to open the IBM Q Quantum Computation Center in Poughkeepsie, New York, later this year, which will expand the network of quantum systems available for use.

The day when quantum computing generates a meaningful amount of revenue for IBM is probably still a long way off. But the company is making steady progress, and it's positioned to be at the center of what could be the next revolution in computing.

Earnings on tap

IBM will report its fourth-quarter results on Jan. 22. Revenue is expected to decline due to a tough mainframe comparison, but the company still expects to produce at least $13.80 in adjusted earnings per share for the full year. For the value investors out there, that puts IBM's price-to-earnings ratio below 9.

Ultimately, IBM will need to prove it can grow consistently before the market values it like the highly profitable, competitive-advantaged company that it is. It didn't get the job done in 2018, with revenue slumping in the second half. It will have another chance in 2019.

Check out the latest IBM earnings call transcript.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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