IBM (IBM) stock has lost one-third of its value since topping $215 in 2013, and if you consider share buybacks, IBM’s market capitalization has crumbled almost 45% from its five-year high.
Just to be clear, IBM deserves everything it has lost, on pace for its fourth consecutive year of revenue declines.
However, IBM has a real shot to break this trend in 2016, and because it trades at just nine times forward earnings, IBM stock price also has a great chance to be much higher this time next year.
That said, there is one way that IBM management can solidify the stock’s fate to trade higher next year.
What Can IBM Do?
The solution is very simple: IBM must report cloud infrastructure revenue as a standalone segment. Why? It would give the company growth, or at least a growing segment.
Check out how IBM’s three largest segments performed during the company’s last quarter.
|Global Tech Services||down 10% to $7.9 billion||down 22% to $1.3 billion|
|Global Business Services||down 13% to $4.2 billion||down 22% to $673 million|
|Software||down 10% to $5.1 billion||down 19% to $1.9 billion|
Collectively, these three segments account for nearly 90% of IBM’s total revenue. The problem is that even smaller segments are also producing year-over-year declines, and the few bright spots are buried within these larger segments like software.
That said, investors need something to get excited about, and IBM can give that to investors if it reports cloud infrastructure as a standalone segment. This would include IBM’s 2013 acquisition of SoftLayer, a business that had revenue of $335 million in the year before IBM’s purchase.
However, Bloomberg recently reported that SoftLayer is on pace for revenue of $1 billion next year, growth of 25% over this year’s expected totals.
What can SoftLayer Do for IBM Stock?
For those unfamiliar, IBM’s SoftLayer directly competes against Amazon.com’s (AMZN) AWS. While SoftLayer is smaller and growing slower than AWS, it is important to note that IBM is at the epicenter of the cloud with trailing 12-month revenue of $9.4 billion in total cloud revenues.
Therefore, IBM has a great opportunity to build off this presence to grow SoftLayer revenue much larger as it continues to invest in data centers and other means to boost cloud capacity.
Nevertheless, IBM’s SoftLayer doesn’t need to be as large or as fast-growing as AWS to boost IBM stock price. Keep in mind that since AMZN started reporting AWS revenue and profits earlier this year, it has added more than $130 billion in market capitalization to the company, about equal to IBM’s entire market capitalization
Even if IBM’s stock could add $15 billion to its market capitalization by reporting SoftLayer as a standalone unit that would create upside of 10% next year — not unrealistic given what AMZN saw from AWS this year. When combined with IBM’s already cheap stock price and the potential for flat revenue in 2016, IBM stock could be a very nice performer in 2016.
One Last Thing to Consider
Earlier this year, IBM announced a new Internet of Things segment. While this IoT segment will be small relative to the rest of its business, it will showcase double-digit, possibly triple digit-growth in an otherwise boring on-premise IT business.
If IBM would take it one step further and incorporate a cloud infrastructure segment that would also tout double digit growth, it would account for enough revenue (when combined with IoT) to create real excitement surrounding IBM stock.
The gains could be even greater when coupled with the performance for IBM’s new IoT segment. When you put it all together, the bottom line is that IBM stock has a good shot to trade much higher next year, that is if management is smart enough to let its bright stars shine (ie IoT, SoftLayer).
Unfortunately, whether management makes this move is a bigger question than it may otherwise seem. Investors should keep a close eye on any potential news as 2016 nears.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.