Summary
- Like Microsoft from a decade ago, IBM is seen and valued as a legacy technology company.
- I see IBM as being on the cusp of a technology transformation, and believe the hybrid cloud represents a substantial opportunity.
- I believe the shares are attractively valued at present, and may see strong gains after the spin-off.
IBM (IBM) has seen its share of challenges, with declining annual revenues over the past decade. However, I see reasons to be optimistic, as IBM has positioned itself to capture a substantial share of the sizeable hybrid cloud market. At present, I see parallels between IBM of today and Microsoft (MSFT) from a decade ago.
While Microsoft is undoubtedly a Wall Street darling today, those with a longer memory may note that this was not always the case. Back in 2010, Microsoft was seen as a legacy technology company, with stagnating revenues and trouble finding areas for growth. Both Apple (AAPL) and Google (GOOG) (NASDAQ:GOOGL) had already dominated the mobile operating system market at the time, and Microsoft found itself late to the game.
Microsoft made a number of missteps, not least of which was its ill-fated $7.2 billion acquisition of Nokia in 2013, which it subsequently sold for a paltry $350 million three years later. It did, however, eventually find its footing. With a new CEO and a robust public cloud strategy, Microsoft transformed itself into the darling that it is today.
I believe IBM is at a similar cusp of a technology transformation. While I cannot (nor should) promise the same result for IBM as that of Microsoft, I believe the hybrid cloud presents a similar opportunity for IBM as what the public cloud presented for Microsoft. In the following section, I evaluate what makes IBM an attractive investment proposition at the current valuation; so let’s get started.
A Look Into IBM
IBM has been a disappointing investment for its investors over the past decade. As seen below, the shares have posted a total return of just 22%, compared to the 263% return of the S&P 500 (SPY).
(Source: Dividend Channel)
While the underperformance of IBM’s legacy product lines has been disappointing and likely will continue to be challenged, I’m optimistic about IBM’s future in the hybrid cloud. As the new CEO Arvind Krishna noted, the hybrid cloud presents a $1 trillion market opportunity. This compares favorably to the worldwide public cloud services market dominated by Amazon (AMZN) and Microsoft (MSFT), which, according to Gartner, represents a much smaller $258 billion TAM (total addressable market).
