What happened

Shares of tech giant IBM (NYSE:IBM) increased 17% during the first half of 2021, according to data from S&P Global Market Intelligence. After years of market underperformance, the storied company is finally showing signs of life under new CEO Arvind Krishna, who is spearheading dramatic changes to get IBM up to date with the cloud computing era.  

So what

On the surface, it may come as a surprise that IBM jumped so much during the first half of the year. After all, revenue was up a meager 1% from the year prior in Q1 2021. Free cash flow was up 12% year over year, but that can be a volatile profit metric when viewed on a quarterly basis.  

Someone in a warehouse using a tablet.

Image source: Getty Images.

The likely reason for IBM's stock showing signs of life again has much to do with the pending spinoff of its managed infrastructure business, which we now know will be called Kyndryl. While managed infrastructure remains an important aspect of the global IT industry, this has been a stagnant and below-average profitable operating segment for IBM. The divestiture is expected to be complete by the end of 2021 and should boost the rest of IBM's overall profit margins. It will also narrow the new IBM's focus on cloud computing, which has actually been a double-digit percentage growth area ever since IBM acquired Red Hat back in 2019.

Now what

What remains to be seen is how much legacy business and debt IBM spins off when it parts ways with Kyndryl later this year. That will have a big impact on the remaining tech company's growth trajectory and balance sheet health. But one thing is for sure: Krishna thinks IBM can be a leader in the cloud industry, which is well on its way to reaching $1 trillion a year in global spending.

In addition to the pending spinoff, IBM has also acquired numerous small cloud software and consulting companies so far this year in support of the core cloud services it already has in place. It's too soon to tell if this strategy will pay off or not, but with cloud and edge computing services expected to grow at a rapid pace for the foreseeable future, these are likely the right moves for IBM right now as it gets updated for the times.

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.