IBM (NYSE:IBM) stock has been on a nice run of late. After bottoming out at $120.96 a share on Jan. 27 -- about a week after announcing Q4 and 2015 annual earnings -- IBM shares closed Tues, March 8 at $139.03, good for a 15% pop. The rebound in the global markets has helped boost a number of stocks that had been beaten down of late, but there may be more going on with IBM's upward share price movements than simply getting swept up in the good mood.
Similar to its sometimes partner, sometimes competitor Microsoft (NASDAQ:MSFT), IBM is in the midst of a significant transition away from a reliance on the sale of PC-dependent solutions. The transformation IBM is undergoing can't be done overnight, which has led to uncertainty among some impatient investors. But it's that uncertainty that's made IBM a sound growth and income value opportunity for a while now, and it appears some investors are finally beginning to believe.
And so it begins
Two years ago, IBM made the tough decision to transform itself into "much more than a hardware, software, [and] services company." The result was CEO Ginni Rometty's laser-like focus on IBM's "strategic imperatives," which consist of big data, analytics, the cloud, mobile, the Internet of Things (IoT), and data security.
IBM's total revenue has been on the decline as the shift in focus has taken hold, and investors have shied away. But that's changing as the Street recognizes that what matters when gauging IBM's worth as a growth and income alternative are the results of its $5 billion-plus investments in its strategic imperatives.
The progress IBM is making is, if anything, ahead of Rometty's goal of deriving 40% of total revenue from strategic imperatives by 2018. Two years ago, when IBM dove into the deep end of the transformation pool, 22% of its total revenue came from its new units. Not exactly overwhelming, but IBM had just fully committed itself to new, fast-growing markets.
Fast forward to 2015, and IBM made significant strides where it counts, led by its strong analytics and cloud results. In total, strategic imperatives generated an impressive 35% of IBM's $81.7 billion in 2015 sales, which was up from Q3's total of of "just" 28%. The trend is clearly moving in the right direction, and if investors are finally giving IBM time to cement its place among the leaders in several multi-billion market opportunities, this will be just the beginning of its stellar stock price run.
There is a precedent to the earlier shunning of IBM stock by investors: Microsoft. CEO Satya Nadella's strategic imperatives are his "mobile-first, cloud-first" initiatives. When Nadella took the reins as CEO two years ago, Microsoft was right where IBM was until recently. An over-reliance on a dying PC market left investors and pundits alike bemoaning the fact that technology had seemed to pass Microsoft by. Then the transformation took hold.
Microsoft now boasts an annual run-rate of over $9.4 billion in cloud sales, putting it near the top of any provider list. IBM, by comparison, ended 2015 with a $5.3 billion annual run rate. Nadella has also stuck to his mobile-first guns. Making Office 365 available for iOS and Android devices was a precursor to getting Microsoft software and services into as many mobile hands as possible, regardless of a unit's manufacturer.
Just as with IBM, Microsoft is a work in progress, but pundits have bought in to Nadella's mantra, as demonstrated by a consensus price target of $60 a share and a host of recent analyst upgrades. Now, it's IBM's turn.
As Rometty put it, "data is the world's new natural resource," and IBM's strategic imperatives are ideally suited to garner more than its fair share of the spoils. The $5 billion plus IBM has invested in its strategic imperatives to win the data wars is beginning to pay off, and just as importantly, it appears investors are finally beginning to recognize it.