IBM (NYSE:IBM) has been sideways for almost a year and I believe that this is a typical “lull before the storm.” From a technical perspective, IBM stock is in a zone of consolidation and I believe that $120 to $140 will be a long-term support zone for the stock. In-sync with this view, IBM can be accumulated at current levels for break-out on the upside in the coming quarters.
The acquisition of Red Hat will be a game-changer for IBM as the company focuses on growth in the hybrid cloud market.
To put things into perspective, Allied Market Research expects the hybrid cloud market to grow at a CAGR of 21.7% between 2018 and 2025. Similarly, Mordor Intelligence expects the market to grow at a CAGR of 18.7% between 2019 and 2024. Clearly, hybrid cloud business will grow at 18% to 20% in the next 3-5 years. This presents a huge opportunity for IBM.
Growth Will Accelerate in 2020-2021
IBM expects mid-single-digit revenue growth by 2020-2021 and that’s very likely considering the industry growth potential.
In the cloud segment, the following deals are worth noting in the last 3 months –
- IBM and AT&T (NYSE:T) signed a multi-year strategic alliance and this will enable moving AT&T business application to IBM cloud.
- National Express, a leading public transport operator, announced partnership with IBM for hybrid cloud.
- Avaya Holdings (NYSE:AVYA) signed a deal with IBM adopt hybrid cloud solutions.
While these are known facts, the point I am trying to make is that IBM is aggressively marketing its hybrid cloud solutions and I expect a flurry of deals in the coming quarters. This will add to the company’s growth momentum for 2020 and beyond.
Of course, IBM is still a laggard as compared to Amazon.com (NASDAQ:AMZN), Microsoft Corporation (NASADQ:MSFT) or Alphabet (NASDAQ:GOOG). However, after several years, IBM seems to be showing aggressive intent and growth is likely to follow.
IBM Will Benefit from Multicloud
Even with players like Microsoft and Amazon ahead of IBM, there is significant impending growth in cloud business.
One of the major advantages for IBM is the trend that companies are increasingly using multicloud. In other words, a corporate utilizing Microsoft cloud is also a potential customer for IBM.
The reason for using multi-cloud is well elaborated by Gartner analyst, Michael Warrilow –
Most organizations adopt a multi-cloud strategy out of a desire to avoid vendor lock-in or to take advantage of best-of-breed solutions… We expect that most large organizations will continue to willfully pursue this approach.
Therefore, IBM might be a laggard in terms of entry in the cloud business, but the company has a robust visible market considering the above factor.
The following observation by IBM-commissioned study by McKinsey & Company provides insight on the impending growth –
Most enterprises are only 20 percent of the way into their cloud journeys. The simplest workloads are in the process of migration, but according to the study, the remaining 80 percent of workloads are still on-premises.
Clearly, there is scope for growth for several big players in the market. I believe that IBM will make inroads even with the competition from companies who are market leaders in the cloud business.
Final Words on IBM Stock
IBM stock has remained sideways in the last few quarters and this is a good accumulation opportunity. IBM has been a laggard in the past, but the acquisition of Red Hat has translated into aggressive growth intent.
I believe that the IBM stock price has still not discounted the positives. Market participants are waiting for numbers that are in-sync with the renewed optimism of the management. However, considering the growth potential in hybrid cloud, it is entirely likely that IBM will meet expectations.
Therefore, it makes sense to accumulate IBM stock at current levels with an initial investment horizon of 12-24 months. If the company can deliver revenue growth in 2020-2021, IBM stock can go ballistic.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
