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Why IBM Stock Jumped 7% Today

By Howard Smith – Updated Oct 8, 2020 at 11:34AM

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The company announced a big strategic move that helps investors focus on its growth business.

What happened

Shares of IBM (IBM -1.48%) soared almost 10% this morning, before settling back with a gain of 7% as of 11:00 a.m. EDT. The jump brought the share price to a four-month high. 

So what

The company announced it will spin off its managed infrastructure services business into a separate new company. The spinoff, which will be tax-free to existing IBM shareholders, is expected to be completed by the end of 2021. IBM hasn't revealed the name of the new company yet. 

the word spinoff surrounded by related others including strategy and target

Image source: Getty Images.

IBM says in its statement that the newly formed company will be the top provider of managed infrastructure services globally. But the portion of the business that remains is what has investors excited today. 

Now what

What many investors had come to see as a legacy tech company made a splash by acquiring Linux vendor Red Hat in 2019. The $33 billion acquisition brought a lot of debt, but also gave IBM a new direction in the cloud computing market. With the spinoff announced today, the company is turning its hybrid cloud business into a single business focus. 

Investors are cheering the move, which allows the company to focus on what it says is a $1 trillion market opportunity. The potential growth is in contrast to slowing software sales and its cyclical mainframe server business. 

In describing the thought process behind the separation, CEO Arvind Krishna said in the release, "Client buying needs for application and infrastructure services are diverging, while adoption of our hybrid cloud platform is accelerating." 

By focusing on its open hybrid cloud and artificial intelligence solutions, the company says it will have more than half its revenue in "high-value cloud software and solutions," much of which comes as recurring revenue.

it 

Howard Smith has the following options: long January 2022 $145 calls on IBM and short October 2020 $130 calls on IBM. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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