Down about 10% so far this year, IBM (NYSE:IBM) stock can't seem to break out of its malaise. The concerns have become a recurrent theme among old-school technology stocks heavily reliant on the ebbing PC industry. Just as with many of its peers, IBM was slow to make the transition to a Big Data and cloud-based world, and shareholders have paid the price.
That said, CEO Ginni Rometty and team are well on the way to transforming IBM into a Big Data powerhouse as the Internet of Things takes hold, providing companies with an unprecedented amount of information. Beyond Big Data, another one of Rometty's "strategic imperatives" is its fast-growing shift to the cloud. Though not quite up there with its old friend and sometimes foe, Microsoft (NASDAQ:MSFT) -- with its more than $8 billion annual run-rate of cloud-related revenue -- IBM isn't far behind.
And based on its recent announcement, it appears IBM could make up some ground in the all-important battle for the cloud.
So far, so good
With Q3 earnings news just a couple of weeks away, investors can only hope IBM continues to grow its cloud sales as well as it did last quarter. After adjusting for currency, IBM increased cloud-delivered-as-a-service revenue more than 70% in the second quarter, and the fast-growing unit is now tracking at a more than respectable $4.5 billion annually.
To put IBM's cloud sales into perspective, last quarter its beleaguered hardware division -- a unit that some investors still seem to look to as indicative of its performance -- generated a mere $2.1 billion in revenue. In other words, cloud-related sales are more than twice that of IBM's legacy hardware business, and that disparity will become even more profound in the quarters and years ahead, particularly if IBM is able to ink more cloud deals such as its recently announced $1 billion whopper.
Score one for Big Blue
Though a bit late to affect the recently completed third quarter's cloud results, IBM's recent long-term deal with Norway-based IT services provider EVRY will pay dividends for years to come. On Oct. 1, IBM said it entered into an agreement with EVRY to provide a bevy of cloud infrastructure and related services for a cool $1 billion over the next 10 years.
The arrangement calls for IBM to "transform EVRY's existing infrastructure services by using IBM's proven methodology and global expertise and giving the company access to IBM's global cloud resources and capabilities."
At an average of $100 million annually over the life of the contract, the partnership with EVRY doesn't immediately push IBM to the top of the cloud heap, but it is yet another indication that Rometty's strategic imperatives are taking hold. And the timing couldn't be better.
How big is big?
The combined software-as-a-service and platform-as-a-service delivered through the cloud is expected to become a more than $100 billion marketplace in a few short years. One reason investors would be wise to consider IBM as a legitimate, cloud-related alternative is that its product suite includes both SaaS and PaaS solutions. That's a critical distinction, particularly as the market for cloud hosting becomes commoditized thanks to ongoing price wars.
The $1 billion deal with EVRY was the big news, of course, but IBM also introduced new Bluemix and Relay cloud platform and technology, respectively. Bluemix gives developers the ability to build a safe and secure app and seamlessly deploy it across multiple platforms. IBM's new Relay technology pulls information together from disparate systems, syncing updates and providing clients such as EVRY a more efficient single data access point.
With a few more cloud wins like the recently announced deal with EVRY, IBM should finally be recognized among investors for what it is: woefully undervalued -- it's trading at just 9 times forward earnings -- and a leading cloud and Big Data provider with one of the tech industry's best dividend yields at 3.6%. When that time comes, IBM shareholders will be smiling all the way to the bank.
Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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