International Business Machines (IBM) last month posted an earnings surprise — good news that was dulled a bit thanks to disappointing overall sales thanks to a strong U.S. dollar.
Cloud computing and data analytics made up about 27% of its business in the last year, but dwindling sales of IBM’s ancestral software and services is prompting Big Blue to put its cloud and data business on the front lines.
InvestorPlace’s James Brumley noted that this strategy of IBM effectively buying its way into the cloud race is working, though that premise at the time wasn’t enough to recommend investors start clamoring over IBM stock.
IBM’s Vice President of Investor Relations Patricia Murphy reaffirmed the tech giant’s commitment to turning its business around with the more innovative and profitable ventures in the cloud and data analytics, allocating billions of dollars to cloud and data with initiatives in the Internet of Things and Watson Health.
Here’s why the cloud and data are so important to the future of IBM stock:
Healthcare Cloud Technology
Explorys and Phytel are two small yet crucial cogs powering IBM’s healthcare cloud. Their acquisitions position IBM for growth in the burgeoning cloud market through Explorys’ healthcare partners and cloud-computing platform, boasting a cumulative $69 billion in the sector and integration in 26 healthcare systems, respectively.
Phytel, the more modest of the two recent IBM acquisitions, offers integral technology solutions for physicians such as identifying patient care needs, standardizing evidence-based care methods and affecting longitudinal health outcomes.
The Bureau of Labor Statistics pegs healthcare as among the economy’s fastest growing industries over the next 10 years, and the IDC came to a similar conclusion in its Health Insights, estimating 8% to 11% annual growth rate in the analytics market during the years from 2010-20.
Analytics are critical to healthcare’s future, and IBM’s healthcare cloud allows for deep-reaching population health analytics for professionals to use in an actionable way, and the IDC expects Big Data to grow at an annual compound rate six times that of the entire IT market, reaching $41.5 billion through 2018, while analytical tools like IBM’s Watson will grow roughly two-thirds faster than the market this year alone.
IBM Is in Good Company
- Through Apple, IBM will have a major resource for health data by mining Apple’s ever-growing consumer base. Anyone who uses an Apple device loaded with HealthKit (and ResearchKit for the developers out there) feeds Watson with personal health data to use in its cloud.
- JNJ is among the largest manufacturers of knee and hip implants and uses IBM’s Watson to acclimate patients before and after knee surgery.
- MDT makes several healthcare devices, ranging from devices for heart conditions to diabetes, using Watson to connect its devices a lá the Internet of Things, gathering data on patients and monitoring the viability of its devices to alleviate symptoms.
IBM stock represents one of the top four holdings of Warren Buffett’s Berkshire Hathaway (BRK.A, BRK.B). Berkshire holds about 77 million shares of IBM, and that includes an increase in his stake in Q4 2014.
Having the faith of Warren Buffett in a turnaround effort is encouraging, and at least so far this year, IBM is proving worth it, up 6% year-to-date versus an S&P 500 that’s up just 1%.
That turnaround is dependent on IBM’s cloud and data initiative — currently just about a quarter of its business. Still, Big Blue’s recent earnings report shows strength in its high-end systems and promise of “a higher value, higher margin business” this year. Cloud revenue in its most recent quarter was up more than 75% adjusting for currency, and business analytics saw a 20% pop in revenue.
And the broader numbers look good too. The high end of IBM’s estimate for full-year earnings — a range of $15.75 and $16.50 per share — is above the Wall Street consensus.
Combine that with a low 10 forward price-to-earnings ratio and a cash funnel being directed into buybacks and a dividend yielding 3%, and IBM stock looks like a good value play while the company recovers from a lousy pair of years.
As of this writing, John Kilhefner did not hold a position in any of the aforementioned securities.