Some of my investor friends view IBM (IBM -8.84%) as a stodgy, old company that's long been behind the times. Others are only attracted to the stock for its dividend. These lackluster sentiments are understandable.
Even before the coronavirus pandemic introduced massive disruption, IBM suffered from declining revenue. But Big Blue took action to reinvent its organization around new opportunities created by the advent of cloud computing.
Today, IBM is a very different company from the one operating before the pandemic. With a new CEO and a slimmed-down organization focused around the growth areas of cloud computing and artificial intelligence, IBM offers compelling reasons to invest.
Image source: Getty Images.
IBM's transformation is complete
IBM enters 2022 as a new company. Big Blue's multi-year transformation reached its culmination last November when it completed the separation of its managed IT infrastructure services into a new publicly traded entity called Kyndryl (KD -0.12%).
The operations under Kyndryl comprised about a quarter of IBM's revenue prior to the spinoff, yet those segments struggled, masking the strong growth IBM was experiencing in other lines of business. Through the first three quarters of 2021, Kyndryl's share of revenue was down 2.2% compared to 2020, along with a net loss of $1.6 billion.
IBM's revitalization began under former CEO Virginia Rometty. The pivotal 2019 acquisition of Red Hat, a popular open-source cloud computing company, occurred under her watch.
This critical acquisition paved the way for IBM to accelerate its transformation. The company promoted its cloud division head, Arvind Krishna, to the CEO position in 2020. And Kyndryl's 2021 separation marked the end of this journey and the birth of the new IBM.
Positioned for success
With Kyndryl gone, IBM can concentrate on its burgeoning businesses. Krishna remarked, "We have the correct portfolio to be able to grow where our clients have got demand and where the market has demand." He's right.
IBM focuses specifically on hybrid cloud computing. The hybrid approach marries the low cost and scalability of public cloud options with the greater control and security of private clouds. It's a growing area of the cloud computing industry. The hybrid cloud market is forecast to increase from $56 billion in 2020 to $145 billion by 2026.
Hybrid clouds are a particularly compelling solution for industries requiring regulatory compliance or a high level of security, such as healthcare, finance, and government. Many of IBM's core clients are in these industries. Big Blue provides essential IT services to these companies, making IBM well-positioned to maintain its customers given the high switching costs to move to a rival.
IBM's assets align well with its strategy around the secular trend of cloud computing to successfully execute that strategy. For instance, Red Hat's customers already include 94% of the Fortune 500, and the company's consulting arm, which helps clients choose and implement IBM's offerings, serves 100% of the top 10 banks, automotive firms, telecoms, national governments, insurance, and healthcare companies in the world.
Back in revenue growth mode
IBM possesses the pieces for success, but how does that translate into results? The company's recently released earnings report provides a glimpse into the new IBM's performance. Its fourth-quarter and full-year financial results were presented on a continuing operations basis, so these numbers exclude Kyndryl.
Q4 revenue came in at $16.7 billion, up 6.5% year over year. For the full year, revenue reached $57.4 billion, up from 2020's $55.2 billion. Q4 hybrid cloud revenue was up 16% year over year to $6.2 billion as IBM added 1,000 clients to its hybrid cloud offerings in 2021.
The company's consulting division was up 13.1% to $4.7 billion in Q4. IBM expects this segment to see revenue growth in the high single digits through 2024.
IBM's infrastructure segment, which includes hardware such as servers for the private cloud portion of a hybrid solution, was the one division delivering significant income to see its revenue drop from 2020. IBM's hardware product cycle contributed to the division's 0.2% year-over-year decline in Q4. But the company anticipates sales to pick up after the first quarter of 2022 when the latest version of its IBM Z mainframe computer debuts in Q2.
IBM's Q4 results are only the beginning. The new IBM expects to generate revenue growth of about $3 billion annually through 2024, and cumulative free cash flow totaling around $35 billion in that time. With this free cash flow, IBM can maintain its dividend, currently yielding an impressive 4.9% at the time of this writing.
The company's Q4 results reveal Big Blue is capable of achieving its forecasts. With its multi-year transformation complete and revenue growth ahead, now is a good time to invest in the new IBM.
