International Business Machines Corp. (IBM) has certainly been on a bad run, especially for investors. But things may be changing — and the reason is deal-making. Today the company announced the $2.6 billion acquisition of Truven Health Analytics, which is a top provider of healthcare data analytics.
On the news, IBM stock is up about 5%.
Keep in mind that there is still much to do to get things back on track. After all, IBM stock is still down about 24% since July.
Let’s face it, the core business has continued to languish. In the fourth quarter, revenues plunged by 8.5% and the guidance was definitely uninspiring.
The problem is that IBM has been paying the price for its foot-dragging with the move to the cloud. The result is that a variety of other companies, like Salesforce.com, Inc. (CRM), Workday Inc (WDAY), ServiceNow, Inc. (NOW), Amazon.com, Inc. (AMZN) and even Microsoft Corporation (MSFT), have been able to get the lion share of the opportunity.
Interestingly enough, the growth in the cloud has also weighed on the IBM consulting services unit. After all, there is not as much need for these types of offerings when companies are using technologies that are easier to install and maintain.
So to put things into perspective, IBM has seen over $25 billion in annual revenues disappear since 2011! Oh, and there have been declines for 15 straight quarters. So in light of this, is it any wonder that IBM stock has been a loser?
All kind of grim, right? Perhaps so. Yet for gusty investors, there are still some positives to consider.
The Silver Lining for IBM Stock
Basically, IBM has been focused on aggressively pursuing its so-called Strategic Imperatives, which involves heavy investments in fast-growing categories like security, mobile, the Internet-of-Things (IoT), analytics and the cloud. And so far, there has been traction. Last year IBM posted a 26% increase in revenues for its Strategic Imperatives, which now account for a hefty 35% of overall revenues.
But at the heart of all this is a focus on cognitive functions. In other words, this involves the ability to process huge amounts of data so as to allow for better decisions. This is really about the next phase of the cloud revolution, which will go beyond just allowing for ease-of-use and lower costs.
The good news is that IBM is nicely positioned for this megatrend. Keep in mind that last year, the company generated almost $18 billion in revenues from analytics. No doubt, a key has been from its Watson technology.
In fact, to bolster this, IBM has been smart to acquire data-savvy companies, such as the Weather Company and yes, Truven.
Although, the deal for Truven could provide the biggest catalyst for IBM stock. Consider that the company will have a data set of about 300 million patient lives, with information on important categories like costs, claims and outcomes (there have also been other important acquisitions in the space during the past year, such as for Phytel Inc., Explorys and Merge Healthcare). Truven will also bring with it over 8,500 customers.
All this technology should help with the major changes in the healthcare industry, which will increasingly be about getting better value for services and a move away from the traditional fee-for-services model. And this requires sophisticated data and insights.
The market opportunity is also massive. According to a report from Grand View Research, the spending on healthcare IT is excepted to hit a whopping $104.5 billion by 2020 in the U.S.
Bottom Line on IBM Stock
The valuation on IBM stock is certainly at attractive levels, with the forward price-to-earnings ratio at only 9X. By comparison, Oracle Corporation‘s (ORCL) is at 13X and Microsoft trades at a multiple of 17X. What’s more, IBM sports a dividend yield of 4.3%.
But there is more than just a cheap stock here. IBM has key advantages that should help it be a winner in the move towards cognitive computing — including a trusted global brand, a massive infrastructure and armies of talented engineers and scientists.
Granted, it will probably take more time for the efforts to really move the needle.
Yet the good news is that IBM is making the right moves to get things back on track.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.