Following the announcement of a "disappointing" 2014 Q1, IBM (IBM -1.05%) stock took a hit. On April 16, the day IBM shared its earnings results, its stock closed at $196.40 a share. But lower earnings per share, net income, and revenues compared to 2013 Q1 were a bit too much for investors to swallow, and the following day IBM's share price dropped over 3% to $190.01 a share. With those kind of financial results, it's not hard to see why the market reacted as it did.
However investors, to their credit, seem to have reevaluated IBM's quarter, and slowly but surely its stock price has inched up to pre-earnings release territory, just as it should have. Why? Because CEO Ginni Rometty and team have chosen a new path for IBM, and investors may have got back to what really matters: namely, how IBM is progressing in cutting edge technologies like the cloud and big data.
The silver lining
The days of blue suits and red ties no longer define Big Blue. It was Jan. of 2012 when Rometty took the reins at IBM, and she made it clear from the get-go that times were changing, and IBM needed to change, too. Hardware, once IBM's bread-and-butter, was the past, and the results in its systems and technology division make that all too clear.
The first quarter of 2014 was much like IBM's year-end quarter for its hardware division. IBM's hardware unit was down $1.7 billion in 2013, losing a total of $500 million for the year. In its recently announced 2014 Q1, it was more of the same as systems and technology results were off another 23% compared to the prior year's already depressed revenues. Naturally, such a poor outcome from what was once the backbone of IBM played a big part in its string of poor financials.
But the upside, for both IBM and long-term investors, are the strides it's making in the areas that really matter: cloud, business intelligence (BI), and big data solutions. According to IBM, cloud services is a $250 billion market and its safe to say it's getting bigger, not smaller, as more businesses (and individuals) look to cloud solutions.
As Rometty put it in IBM's recently announced Q1 earnings, its objective is to "shift aggressively to our strategic growth areas including cloud, big data analytics, social, mobile and security." Those are the areas that investors should focus on to determine if IBM is worth consideration, and that's when things start taking a turn for the better.
If Rometty's comments sound eerily familiar to Oracle (ORCL 2.02%) fans, they should. Like IBM, Oracle and CEO Larry Ellison were late to jump on the cloud bandwagon, but its firmly entrenched in offering a full slate of cloud solutions now. Oracles nearly 4% jump in share price the last few days is due, in large part, to what one analyst referred to as its "winning cloud strategy."
Taken as a whole, Oracle's most recent quarter, its fiscal 2014 Q3 announced in March , was only so-so. Total revenues were up, but only a modest 4% compared to the year-ago quarter. Earnings also rose by 8% on a GAAP basis, which is nothing to sneeze at. But where Oracle really blew the doors off was growth in its cloud revenues. Oracle enjoyed an increase in its cloud software subscriptions last quarter, jumping 24% in Q3. And overall, Oracle's cloud business was up60%. IBM isn't alone in the cloud, and that means new and better solutions will be key drivers going forward.
Another step in the right direction
Despite IBM's impressive cloud results of late, it's not standing pat. IBM recently announced its new enterprise cloud marketplace, what it refers to as a "cloud innovation hub." IBM's new cloud solution is a one-stop, cloud alternative for virtually everything an IT manager, developer, and business owner needs. With IBM's wide variety of existing cloud services, combined with those of several partners that are also part of its new cloud marketplace, there's some real potential to grow this key area even faster.
Final Foolish thoughts
With cloud hosting price wars in full swing, don't expect much from cloud hosting providers that aren't able to offer the value-added solutions that an IBM can. Now, with its new enterprise cloud marketplace up-and-running, the differences have become even more pronounced. IBM has never been an ideal option for short-term, in-and-out investors; and it certainly isn't now. But with a 2.26% dividend yield, a forward price-to-earnings ratio of just 9.8, and its cloud services gaining market share seemingly daily, IBM makes a strong case for long-term investors.
