International Business Machines (NYSE:IBM) remained mostly on the sidelines when the cloud-computing era began, and that oversight hurt IBM stock for some time.
In 2015, IBM did finally move into the cloud by prioritizing analytics, cloud, security and mobile. Labeled “strategic imperatives” by the company, the initiative helped IBM stock recover for a short time in 2016.
But the good times didn’t last for IBM stock. IBM’s total business is still shrinking, and International Business Machines stock continues to, albeit erratically, lose ground.
That’s not how IBM CEO Ginni Rometty or the owners of IBM stock envisioned things taking shape when the company’s strategic imperatives program was launched four years ago.
Maybe the fact that the strategy still isn’t increasing IBM’s bottom line or preventing its revenue from dropping indicates that the initiatives are not improving IBM’s results enough to boost IBM stock price and may never do so.
IBM Was Late to the Party
It’s not difficult to see why IBM decided to steer clear of the cloud in the early 2000s. At that time, when the cloud was just starting to become productive, it was new and its value was unproven.
But even after the term “cloud computing” was coined by Eric Schmidt in 2006, the concept’s commercial potential wasn’t fully foreseen until years later.
Meanwhile, IBM didn’t get serious about multiple new technologies, including the cloud, until well after other players had a commanding lead in them.
To the detriment of IBM stock price, the company’s attempts to catch up have mostly failed. Its contributions to cloud computing and mobile markets have actually been marketable. However, its legacy businesses — including mainframes and on-site servers — are proving to be a remarkable drag on IBM stock price.
“Less Bad” Isn’t the Same as “Good”
The phrase “strategic imperatives” isn’t being batted around as much by IBM as it used to be, when the strategy was expected to rejuvenate IBM stock price.
Strategic imperatives revenue now (usually) exceeds the company’s old-school business revenue. That tipping point came in the second quarter of last year.But the growth of the strategic imperatives initiatives is still not offsetting the poor results of the company’s legacy businesses. That, basically, is why International Business Machines stock has struggled.
Meanwhile, some of the company’s strategic imperative businesses themselves aren’t growing much. The top and bottom lines of its “Cloud and Cognitive Software” business, for example, are just barely increasing.
The Outlook of IBM Stock
It’s possible that by the time you’ve read this, IBM will have already updated its full-year outlook to reflect the impact of the Red Hat acquisition. The company’s annual investor call, when it was supposed to provide the update, was slated for Aug. 2. Red Hat is expected to meaningfully increase the company’s top and bottom lines.
Red Hat did about $3.4 billion worth of business in its most recent fiscal year, and turned $679 million of it into net income. IBM’s figures should (more or less) be boosted by those amounts; any variance will be the result of what Big Blue does or doesn’t do with its new unit.
Whatever lies ahead, however, it seems unlikely that Red Hat will dramatically change the company’s overarching direction or have much impact on IBM stock price.
For International Business Machines stock to get on a bullish path, the company needs organic growth, not acquisition-driven growth. That’s still not happening.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.