With every passing quarter, IBM (IBM 0.16%) looks more and more like an amped-up version of Red Hat. After buying the open-source software veteran in a blockbuster $40 billion deal in 2019, Big Blue has only increased its focus on exactly the things Red Hat did best when it was a separate company.
And you know what? That's just great.
Image source: Getty Images.
Shifting sands
IBM's third-quarter sales fell 3% year over year to $17.6 billion. Within that slight drop, global business service sales fell 5% and global technology revenues came in 4% lower. Systems sales plunged 15% lower, driven by the usual fade-out near the end of multiyear product cycles in the mainframe and storage markets.
Those declines masked Big Blue's 7% revenue increase in cloud and cognitive software, including a 20% gain in the cloud and data platforms subsector. Cloud-based sales soared 60% higher.
In other words, the businesses that made a success story out of IBM in the 2000s showed signs of crumbling, but the cloud computing and data platform operations are firing on all cylinders. That's neither a surprise nor an accident, of course. We're watching IBM finally completing that long-awaited strategy shift that began when Ginni Rometty took over as IBM's CEO in 2012. The new business model looks an awful look like Red Hat, but with deeper pockets and a massive global sales machine.
Word to the wise
You don't have to take my word for it. On the earnings call, CFO James Kavanaugh made it perfectly clear that IBM is reshaping itself around the game-changing Red Hat acquisition. Here's what Kavanaugh said when an analyst asked for more detail on the planned spin-out of IBM's legacy services:
"We are focused now with the strategic move that we announced ... we laid that foundation over the last couple of years, instantiated in the Red Hat acquisition, which was a bold move," he said. "Now, we want to capitalize on that $1 trillion hybrid cloud opportunity."
Image source: IBM and Red Hat, an IBM company.
You should buy IBM stock today
I owned shares in both IBM and Red Hat when the companies announced their merger. Transforming IBM into a larger version of Red Hat with enormous resources is just about the best outcome I could have imagined from that audacious deal. The business services company that will be created next year may or may not find a permanent place in my portfolio, but the revamped IBM stock should deliver impressive cloud-based growth for many years to come.
The spinoff-related management comments in this earnings call made it clear that Big Blue is going in the right direction. The new Red Hat DNA is making a permanent home in Big Blue to the point that you might want to call it Big Purple when the spinoff is complete. If I didn't already have a substantial position in IBM stock, I'd want to start one today. Market makers made that move even easier by giving IBM a 6.5% haircut on Tuesday. Take that discount and run with it.
