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Dow Jones News: Microsoft Stock Has Upside; IBM Signs $1 Billion Deal Ahead of Earnings

By Timothy Green - Jan 16, 2020 at 2:21PM

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Strong demand for software should help Microsoft over the next few years, and IBM sells a large bank on hybrid cloud services.

Another day, another rally for the Dow Jones Industrial Average (^DJI -1.74%). The Dow was up 0.64% at 1:50 p.m. EST, bringing the index closer to the 30,000 mark.

Both Microsoft (MSFT -1.71%) and International Business Machines (IBM -2.60%) participated in the rally. Shares of Microsoft were up following an analyst price target bump, and IBM jumped after signing a $1 billion hybrid cloud deal.

Microsoft boosted on software strength

While Wells Fargo analyst Philip Winslow sees sluggish growth for the IT industry as a whole, software will be a bright spot. Winslow expects software spending to grow at a 10.2% annual rate through 2023, providing a positive backdrop for many software companies, especially those focused on the cloud and cybersecurity.

An electronic cloud.

Image source: Getty Images.

Microsoft is one software company that should benefit from solid demand for software. Winslow boosted his price target on the software giant Thursday from $180 to $185, representing 12% upside from the current price. Shares of Microsoft were up 1.2% by early afternoon.

Microsoft's crown jewel is Office, which it successfully transitioned to a subscription-based model with Office 365. On the consumer side, Office 365 now has 35.6 million subscribers. On the commercial side, Office 365 revenue grew by 25% in the latest quarter.

Beyond pure software, Microsoft is having a lot of success in the cloud infrastructure market. Its Azure cloud platform grew by 59% in the latest quarter, and the company managed to snag the $10 billion JEDI cloud contract from the U.S. Department of Defense last year.

Multiple analysts see Microsoft gaining ground on cloud leader Amazon Web Services. Wedbush said earlier this month that it expects Microsoft to win the majority of major cloud deployments, and Deutsche Bank found earlier this week that growth for AWS had slowed in the fourth calendar quarter, partly due to competition from Microsoft.

Microsoft will report its fiscal second-quarter results on Jan. 29, so investors won't have to wait long to see if this analyst optimism is backed up by the software giant's performance.

IBM rises on $1 billion deal as earnings loom

IBM is no stranger to multiyear deals measured in the billions of dollars. The company announced another such deal on Wednesday, securing $1.1 billion over 10 years to overhaul the IT systems of Spanish bank Banco Sabadell. Shares of IBM were up 0.6% Thursday afternoon, a second day of gains for the beaten-down stock.

Under the deal, IBM will help the bank migrate existing applications to a hybrid cloud. IBM's acquisition of Red Hat might have helped IBM close this deal, as Red Hat's OpenShift platform will help Banco Sabadell manage its hybrid cloud environment. The deal was signed in IBM's fourth quarter.

The big opportunity for IBM with Red Hat is selling existing IBM clients with little Red Hat exposure on Red Hat software. The company sees a $1 billion annual revenue opportunity for every 5% of its base of large clients it converts. IBM has also been making its software available on the OpenShift platform, providing another growth opportunity.

This deal comes as IBM prepares to report its fourth-quarter results on Jan. 21. The company's guidance for 2020 will be closely watched after a tough 2019. The combination of the Red Hat acquisition and a recently launched mainframe should fuel revenue growth this year, but whether it's enough to finally move the stock higher remains to be seen.

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Stocks Mentioned

International Business Machines Corporation Stock Quote
International Business Machines Corporation
$126.29 (-2.60%) $-3.37
Microsoft Corporation Stock Quote
Microsoft Corporation
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Dow Jones Industrial Average (Price Return)
$30,709.09 (-1.74%) $-543.62

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