Re-imagining the Cloud Will Be the Secret Sauce for IBM Stock

The cloud has more benefits for IBM stock than you might know

On paper, International Business Machines (NYSE:IBM) has the right components to provide conservative investors and retirees a solid play. Although IBM stock is a boring name relative to its sector’s sexy upstarts, it’s also a proven commodity. As things get shaky in this geopolitically tense environment, a little stability can go a long way.

IBM stock is an underappreciated buy
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Unfortunately, the IBM stock price has been anything but stable over recent years. Since mid-2014, shares have gyrated between hope and despair. Broadly speaking, though, “Big Blue” has disappointed stakeholders.

Even more emblematic is this year’s trading, with the equity taking an early lead before going flat. Now, a question exists whether it can reasonably sustain its newfound momentum. Despite some obvious headwinds, I believe investors’ patience will ultimately be well-served.

 

A Closer Look at IBM

Investment-research firm MoffettNathanson gave some food for thought, although the bulls probably wish it hadn’t. According to the company’s latest report, the legacy tech giant will experience “little to no growth” in earnings over the next three years. Moreover, an activist investor could demand changes, causing an unpredictable ripple in the IBM stock price.

It’s understandable why MoffettNathanson or any analyst would have a pessimistic view. Right now, IBM is on the verge of buying out open-source software developer Red Hat (NYSE:RHT). When it was first announced, the news made waves as it would allow Big Blue to compete in the cloud.

However, bearish analysts anticipate the markets penalizing the IBM stock price for a credibility problem. Despite substantial efforts, IBM lags behind cloud leaders Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT). Also, other competitors like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Alibaba (NYSE:BABA) are gaining ground.

IBM Stock Isn’t Awful

From purely topical numbers such as cloud revenues, it’s easy to dismiss the IBM stock price as overvalued. After all, this is a legacy company older than most InvestorPlace readers.

That said, it’s tough to make an apples-to-apples comparison among various cloud players. Primarily, this is because many companies include segments that lever critical nuances to the analysis. For instance, Microsoft’s commercial cloud revenue includes Office 365, which can distort the bigger picture.

Why? Because Office 365 is both a retail and a commercial platform. Right now, people starving students up to Fortune 500 companies use Office 365. Due to this vast coverage, it’s hard to pinpoint what customers a cloud company is attracting.

Platforms like AWS and Azure appeal to the masses, which means higher volume and lower margins. Companies like IBM and Oracle (NYSE:ORCL) are the opposite. More or less, they seek industry titans, resulting in lower volume but higher margins.

The idea behind the Red Hat buyout is to catalyze Big Blue’s synergies which are attractive to the alpha dogs. As IBM CEO Ginni Rometty mentioned, she’s not interested in Red Hat simply to consume its resources. Instead, Rometty envisions an accretive venture, one that will “unlock the full value of the cloud” for large-scale businesses.

Even without the Red Hat deal, the legacy tech giant offered arguably superior synergies for its cloud clients. This isn’t just about data storage, of which the company levers several massive data centers. Instead, IBM offers holistic coverage, ranging from administrative functions up to cognitive machine learning.

And believe me, the machine learning part is no gimmick. Big Blue has already displaced white-collar workers with artificial intelligence. In terms of big business, IBM stock is a very credible investment.

The Competition Worrying

Another reason why investors shouldn’t panic over nearer-term noise is the competition. Yes, Amazon and Microsoft are the current sales leaders, but they can’t afford to rest on their laurels.

As I mentioned above, these two tend to attract smaller clients. Due to this dynamic, they must constantly fight against the inevitable churn rate.

An important point for those thinking about buying IBM is that rival cloud platforms aren’t as tip-top as typically advertised. Through forums like Reddit, I’ve seen many complaints about AWS’ cumbersome nature. Apparently, the support service for AWS is also lacking.

I’m not surprised about Amazon’s cloud problems. Don’t get me wrong: I think AMZN is a great long-term investment. But it’s also a disruptive one that is stretched wide. In trying to be the jack-of-all-trades, it risks not mastering the essentials.

IBM, though, is singularly focused on business technologies: it’s literally written into their name. With the Red Hat acquisition and synergies, the company could turn a corner, finally. Plus, with the IBM stock price relatively cheap against prior highs, it makes for a solid contrarian buy.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2019/05/cloud-secret-sauce-ibm-stock/.

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