International Business Machines Corp. Stock’s Transition Is Almost Complete

If you’re thinking about buying International Business Machines Corp. (NYSE:IBM) following a surprisingly encouraging third quarter beat, you’re not alone. The IBM stock price today opened just below $160, up almost 10% since the Q3 earnings release, and still going strong, with the media still raving.

IBM Stock's Transition Is Almost Complete

The catalyst, of course, was the earnings report. Analysts were collectively calling for a bottom line of $3.28 per share of IBM stock, and the company reported earnings of $3.30. Revenue of $19.15 billion handily topped outlooks of $18.6 billion. Perhaps most important, the company’s cloud revenue — an area where IBM has not shown much progress — grew 20% year-over-year to $4.1 billion.

Its legacy businesses are still suffering, to be fair, even more now that its so-called “Strategic Imperatives” (analytics, cloud, mobile, security, social) are gaining traction. Last quarter’s top line was the 22nd quarter in a row sales fell on a YOY basis. The pace of the slowdown has slowed to a crawl, though. Indeed, the company loosely suggested that the current quarter’s top line would be bigger than the year-ago quarter, which would end the losing streak.

In other words, the corporate revamp seems to finally be taking hold.

With IBM stock now at least back on investors’ radars, would-be owners would be wise to get a firm grip on what’s working, what’s not, and where its new divisions are headed. The transition away from its old business and toward new ones is starting to matter in a big way.

Breaking Down IBM Stock’s Business

Ol’ Big Blue operates five distinct divisions: Cognitive Solutions, Global Business Services, Technology Services & Cloud Platforms, Systems, and Global Financing. There’s also an “other” category serving as a catchall for items that don’t fit into any other category.

They’re not exactly new divisions. International Business Machines put them in place a few quarters back to better reflect computing technology in the modern era because the advent of cloud computing and wireless internet connectivity changed everything. What is new, however, is that we’re starting to see not just real revenue but also real growth from these new-era efforts, offsetting the business it was losing on other fronts.

Take the Cognitive Solutions arm, for instance, which encompasses IBM’s artificial intelligence offerings, and Watson in particular. Its revenue was up 4% last quarter. Meanwhile, the company’s Systems arm saw a 10% improvement in last quarter’s sales. Though the Global Business Services division saw a 2% dip in revenue, the strategic imperative business within that division saw revenue growth of 10% last quarter.

That’s not the most interesting part of last quarter’s report, though. What’s most interesting is that the company’s Strategic Imperatives as a group saw a 10% improvement in its collective revenue. At the same time, the total revenue declining almost came to a halt. Its Strategic Imperatives now account for 45% of IBM’s total revenue and could soon become the majority of its business.

Said in much simpler terms, IBM is on the precipice of losing its “old school” status and becoming a “new school” organization, joining the ranks of Microsoft Corporation (NASDAQ:MSFT) and, Inc. (NASDAQ:AMZN).

It’s been an ugly transition to be sure and is far from over. There’s a glimmer of hope, however, that the company’s increasingly obsolete business lines like operating systems and mainframes are less of a liability than things like Watson and its cloud products are productive assets.

Looking Ahead for IBM Stock

Again, don’t get overly excited just yet, as many other traders clearly have. Whether the pivot has decisively been made or not, CEO Ginni Rometty still has a mountain to climb. It will be slow slogging.

Last quarter’s apparent pivot though, against a backdrop of a compelling Q4 outlook, is indeed what it appears to be. It’s not likely the company would set itself up to disappoint investors three months from now. If it painted a bullish picture, it must know something investors don’t.

It’s still a speculative trade to be sure, and with Wednesday’s huge bullish gap on the IBM stock price in the rearview mirror, it’s tough for cool-headed investors to step in here. However, once the dust settles and some of the would-be profit takers do their thing, IBM stock could be a compelling, even risky, addition to a portfolio.

Just don’t take your eyes off the turnaround story though, as it’s still evolving.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.

Article printed from InvestorPlace Media,

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