Thursday, December 04, 2014

IBM’s Efforts to Evolve Fail to Impress

Despite IBM's billion-dollar contract wins and sales of non-core divisions, investors remain unconvinced.

International Business Machines (IBM) has been struggling to find its place in the ever-expanding tech arena. It managed the transition from a hardware company to a software and services provider, but it has failed to innovate from there.

Despite significant recent stock gains by competitors such as Apple (AAPL) and Microsoft (MSFT), IBM stock has dropped to its lowest point in over three years.

Shares currently trade around $163 and have not been this low since September 2011. In 2014 alone, IBM stock is down more than 12%, with 7% of that loss immediately following October’s third-quarter earnings results.

IBM has been making headlines recently with news of multi-billion dollar contract wins. But so far those deals aren’t enough to convince investors to bet on IBM stock. Let’s take a closer look to see why that might be.

Three Big Contract Wins

In November, IBM announced a seven year contract with German airline Lufthansa (DLAKY) to manage the the company’s information technology infrastructure division. The deal is reportedly worth $1.25 billion for IBM and should save Lufthansa approximately $85 million per year. IBM will provide the airline with business analytics, mobile computing and cloud services that will allow for expanded customer services and more efficient employees. News of the outsourcing deal failed to move the needle for IBM stock. Shares remained flat after the announcement.

Earlier this week, IBM announced a similar deal with Dutch bank ABN Amro to provide infrastructure and cloud services. The contract is for 10 years, but the exact price remains undisclosed and has only been described as a “multi-billion dollar services agreement.” Similar to last month’s Lufthansa announcement, IBM stock finished the day flat after a brief but short-lived bump in early hours of trading that day.

Late yesterday, news of IBM’s third billion-dollar-plus deal was announced. This is another seven year $1.25 billion contract, this time to provide cloud management services to the world’s largest advertising firm, WPP. Even with a third major billion-dollar win in two weeks, the Street again seemed disinterested. IBM stock finished the day up slightly more than 1% at $164.52.

IBM’s Transition to the Cloud

IBM has taken several significant steps toward furthering its evolution from hardware to cloud services. It sold its x86 hardware unit to Lenovo (LNVGF) for $2.3 billion in January. In October it agreed to pay $1.5 billion to Globalfoundries over the next three years to rid itself of its unprofitable chip-manufacturing division.

The move from hardware to software couldn’t be any clearer. IBM is focusing on the $121 billion cloud services sector rather than struggling to compete with the likes of Intel (INTC) and Oracle (ORCL) in the chip-making and hardware arenas. Currently, IBM’s software segment is responsible for more than one quarter of the company’s revenue and generated $5.7 billion in the third quarter of 2014.

Bottom Line

With billion dollar contract wins, successful sales of non-core divisions and a beaten-down stock price, you might think IBM stock is a good buy. The company is definitely a force to be reckoned with in the traditional enterprise services software arena as well as on the artificial intelligence front.

However, it’s not very likely that IBM will be able to transition into a cloud services provider that can compete with already-established behemoths such as Google (GOOG) and Amazon (AMZN). Granted, a $121 billion industry leaves quite a bit of room for sharing the pie, but compared to existing cloud companies, IBM is just too far behind to surpass the market leaders.

Considering the disappointing third-quarter results and a clear lack of investor confidence, IBM stock doesn’t warrant much enthusiasm now. For investors who already own shares, holding them for the time being isn’t a bad decision, but I wouldn’t suggest sinking new money into IBM stock now.

Article originally appeared on (12/4/14)

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