Over the past year, shares of IBM (NYSE:IBM) fell 13% as the company struggled to grow its top line, which has declined for 11 consecutive quarters. In a previous article, I highlighted IBM's three key weaknesses -- its non-existent growth, its use of buybacks and divestments to inflate earnings, and its dependence on cloud-based gains to offset losses at its core businesses. Today, we'll look at the flip side and highlight three strengths that investors might have overlooked.
1. The growing cloud and the evolution of Watson
Under current CEO Ginni Rometty, IBM started investing more heavily in higher-margin cloud technologies. In 2013, IBM acquired cloud computing infrastructure company SoftLayer Technologies for $2 billion. Last year, it acquired cloud security firms CrossIdeas and Lighthouse Security Group for undisclosed amounts.
Last January, IBM committed $1.2 billion to expanding its global cloud footprint. A major part of that investment was the formation of the IBM Watson Group, which houses its Jeopardy-playing AI Watson, which has since been used to analyze medical data, power smart toys, and even invent recipes of its own.
Rometty believes that Watson could evolve into a $10 billion business within the next decade, which would be equivalent to 11% of IBM's 2014 revenue. Rometty believes that this growth can be achieved if Watson evolves into a powerful analytics tool that piggybacks on its growing cloud services. For example, Watson could eventually analyze marketing campaigns, customer satisfaction, or employee retention rates for companies in the near future.
2. The growth of the "hybrid cloud"
Another key way that IBM can accelerate the growth of its cloud business is through "hybrid cloud" installations. When large businesses are unwilling to abandon older on-site servers in favor of cloud-based ones, they can install hybrid cloud systems which sync archived data to the public cloud while keeping more recent data in private on-site servers. Late last year, IBM signed key hybrid cloud partnerships with German airline Lufthansa, Dutch bank ABN Amro, and advertising giant WPP.
Research firm Gartner expects half of all U.S. companies to use hybrid installations by 2017. Accenture (NYSE:ACN), which recently partnered with Microsoft (NASDAQ:MSFT) to launch a hybrid cloud bundle, noted that 75% of respondents in a recent survey expressed interest in hybrid cloud installations. Therefore, if IBM keeps landing big hybrid cloud deals, its total cloud revenue -- which rose 60% year-over-year to $7 billion in 2014 -- could keep climbing.
3. Its enterprise partnership with Apple
Last year, IBM signed a broad enterprise partnership with Apple (NASDAQ:AAPL), which pairs Big Blue's enterprise know-how with the consumer appeal of iOS devices. The partnership helps Apple gain enterprise clout against Microsoft and Google (NASDAQ:GOOG) (NASDAQ:GOOGL), while IBM gains a presence in consumer-facing products -- which it lost after selling its PC division to Lenovo in 2004.
The partnership allows IBM, through the use of its IBM MobileFirst for iOS platform, to launch native iOS apps for businesses and optimized IBM cloud services on iOS. IBM also started selling iPhones and iPads installed with industry-specific software to enterprise clients worldwide. This lets both companies profit from the relaxation of BYOD (bring your own device) policies in certain industries.
Last December, Apple and IBM unveiled their first ten enterprise apps, which included ones for airline in-flight customer service, law enforcement incident response, field repair calls for telecom firms, and others for banking, insurance, retail, and government purposes.
If Apple gains ground in the enterprise market, IBM's high-margin cloud revenue will likely increase. However, it will be a tough uphill battle for Apple. Microsoft plans to unite PCs and mobile devices with Windows 10, which could marginalize iOS devices in enterprise. Google also recently launched Android for Work and Chromebooks for Work, two programs which split work and personal profiles for BYOD purposes.
IBM stock trades at less than 10 times forward earnings, indicating that its near-term downside could be fairly limited. However, IBM's lack of top and bottom line growth will continue to weigh the stock down until it can grow some firm green shoots.
Watson, the hybrid cloud, and the Apple partnership represent seeds of potential growth for IBM, but investors will likely have to wait several quarters to see if they can help Big Blue's cloud revenue growth accelerate.