It's been nearly three years since Ginni Rometty took the reins of industry stalwart IBM (NYSE:IBM), and what a tumultuous few years it has been. To be fair, Rometty can hardly be held accountable for IBM's snail-like shift from hardware and the PC market to new technologies including cloud computing and big data, among others; shareholders can thank former CEO Sam Palmisano for that.
Rometty also shouldn't be blamed for having to finally bury the "$20 per share in earnings by 2015" hatchet IBM has been touting for about four years now, Palmisano gets the credit for that one, too. Unlike one of IBM's primary competitors Microsoft (NASDAQ:MSFT), IBM's turnaround efforts haven't garnered the trust of investors, many of whom seem to have run out patience. With that said, for value seekers IBM's slide into obscurity is an opportunity; assuming it's able to maintain growth in one, critical area.
The new IBM
There was a collective moan when Rometty and team announced IBM's 2014 Q3 earnings on Oct. 20. Even on a non-GAAP basis -- omitting one-time items -- net income was down 18%, margins declined, and Rometty's cost-cutting initiatives still haven't taken effect, as evidenced by IBM's slight increase in overhead in Q3. The aftermath Q3's disappointing effort was a stock price free-fall from about $182 a share before the earnings news, to IBM's current $163 range. So, what is there for investors to possibly get excited about? IBM's "strategic imperatives" in general, and cloud computing results in particular.
Much has been made of Microsoft's cloud and mobile revenues, rightfully so. With an annual run-rate of approximately $4.5 billion, cloud sales are taking hold and Microsoft shareholders are reaping the rewards. Toss in what appears to be a successful Surface Pro 3 pseudo-tablet launch, and the result is Microsoft's share price nearing $50 a share, a 30% pop year to date.
What may come as a surprise to many is IBM's cloud revenues -- a key component of its strategic imperatives, along with big data, business intelligence, and mobile -- are running neck and neck with Microsoft, and both are growing at rates that blow away the rest of the industry. According to a recent report, IBM generated an estimated $1 billion in cloud-related revenues in 2014's Q2 -- about the same as Microsoft. IBM's Q2 may be a bit high, since it said its tracking at $3.1 billion annually in cloud revenues as of Q3, but either way, those are solid results. And it gets even better.
As per the report, Microsoft led the way in growing cloud market share in Q2, jumping a whopping 164%. Who grew the second fastest? IBM, up 86% compared to the prior year. Cloud industry stalwarts Amazon.com (NASDAQ:AMZN) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) were a distant third and fourth, respectively.
Fair or not, investors have embraced Microsoft's shift to cloud technologies, but IBM has been left out in the cold. Both cloud solution providers generated about the same $22 billion to $23 billion in revenues last quarter, with near-similar percentages coming from cloud revenues, yet Microsoft's stock is soaring thanks to giddy shareholders, while IBM's share price takes a beating.
Can't catch a break
It's not often a company is chastised as IBM has been due to its aggressive buying back of shares. Share buybacks have their proponents and detractors, and there's something to be said on both sides. On the one hand, removing shares from the open market via buy-back initiatives is seen by naysayers as an artificial means of boosting its stock price: as much a PR move as investment-related.
However, when a stock is trading below what management feels is its intrinsic value, buying into a depressed share price makes good business sense, same as with individual investors. IBM has also gotten flak for boosting its dividend, for much the same reasons as the negativity surrounding its massive stock purchases. IBM has consistently raised its dividend, boosting its current yield to 2.69%. When industry pundits start complaining about one of the best dividends in the tech sector that's a lot of negative sentiment, and IBM is feeling it.
When it rains it pours, and there's no doubt IBM is soaking wet. But if it can keep growing its cloud-related revenues, eventually IBM will win back disgruntled investors, as Microsoft has. Because when it's all said and done, for IBM it all hinges on the cloud; any appreciable slowdown in this key area, and it would be time to run for the hills.