IBM Cloud Transition could reverse a decade of stagnation –


IBM (IBM) is expected to report earnings on Monday, July 19, 2021. Currently, the analytical consensus predicts that the company will report revenue and profit of $ 18.29 billion and dil. EPS of $ 2.29.

Brief history of IBM’s cloud transition

IBM was seen as a growth stock at one point, but the logging giant has not been the most relevant name in IT for many years. We believe that IBM’s strengths as an enterprise vendor and its unique expertise in migrating on-premises workloads to hybrid cloud and pure cloud configurations have limited the impact of various competitors like AWS, Azure and Google Cloud.

The past decade has seen IBM experience one of its darkest times. The company was unable to maintain its high-margin, service-oriented model where customers would order custom server systems and deploy IBM’s various AIX-based systems (Modified Unix) and operate various software packages. Many server workloads use a combination of Ubuntu / Unix type setups and even our website is built on Linux / Unix, so we believe there is a future for Linux based server workloads.

The challenge has not been the underlying standard, but rather the pricing differences for IT offerings. Historically speaking, it was difficult to deploy Linux-based servers, so IBM would have on-premises service contracts so that large enterprises (with more sensitive data requirements) could deploy large servers for more sensitive workloads. to data. Historically, IBM has managed to retain the bulk of its enterprise customers, because from an engineering framework AWS is not necessarily that different from a standard Linux server, the only one difference is that it is much easier for small businesses to start their own servers.

So, what has happened over the past decade has been this kind of transition to early growth companies that could quickly leverage a deployable internet infrastructure, i.e., Amazon Web Services. So that part of the market, where a mainstream IT vendor wouldn’t view many of these “up and comers” as viable customers for big IT budgets, has been overlooked.

So Amazon ended up with customers like Lyft, UBER, Airbnb, MLB, Netflix, etc. Many of these companies either did not exist, or did not have digital businesses, and were increasing their IT spending as their businesses grew. Therefore, the path to adoption and retention of these customers was very specific to a scalable, deployable architecture. This did not exist among more conventional IT vendors like IBM, and it was only more recently that IBM’s cloud strategy resembled that of its peers.

IBM passes the course

This does not mean that IBM has completely lost the company’s IT space… It means that IBM’s focus on existing markets with existing IT budgets has failed over the past 10 years. In light of this awareness, IBM communicated to shareholders that they had shifted the revenue mix to cloud and hybrid cloud configurations (this was in 2013-2015 where cloud revenue was inconsequential and mainly a loss. reclassification of income). At first, they went back and changed their pre-existing IT contracts and features to conform to cloud-based pricing models. In 2017, IBM created something extremely similar to AWS called IBM Cloud, and just like AWS, it offers free and increasingly expensive hosting options.

Figure 1. The new IBM Cloud suite

Source: IBM

This is the key product that will allow IBM to better compete with AWS for early stage technology customers. Just like a VC partner cannot anticipate 20 successful candidate companies… neither can IBM. However, unlike the venture capitalist, at least IBM can provide inexpensive infrastructure for the 20 candidate companies. This is how AWS landed many of the great tech unicorns.

Figure 2. IBM Cloud starts to shake things up

Source: IBM

Currently, Cloud revenue represents 36.7% of the revenue mix, and given the growth of the cloud in the foreseeable quarters, we expect the Cloud to represent 40% of the company’s total revenue by the end. of exercise FY’21. This implies that IBM’s cloud-based / hybrid business model will consider appx. $ 29-30 billion in revenue in FY 21. IBM is only a few years away from returning to sustainable growth in teen earnings, a significant improvement over IBM over the past year. the last decade.

Figure 3. Cloud Revenue Comparison Among Top Vendors Q1’21

Source: Cho Research, company reports

Currently, AWS is considered the largest cloud service provider with sales of $ 13.5 billion in the first quarter of 21, although there is some discrepancy between Azure figures given the inclusion of server products and cloud services. So, the definition of cloud specific revenue varies from company to company, although we would say that while AWS and Microsoft Azure are still the 1st and 2nd largest vendors, IBM has managed to catch up, and it doesn’t is not widely reported in the media.

Microsoft reported figure is a bit inflated due to Windows Server license contribution, as opposed to underlying cloud revenue or hybrid cloud related service contracts, it looks like IBM and Microsoft are running companies from comparable size. However, Microsoft has done a much better job of monetizing middleware or operating system licenses while IBM has not been able to generate as much revenue in the form of AIX server licenses.

We also recognize that IBM may also have included more in its definition of a cloud business. However, based strictly on the numbers we can work with, we believe IBM Cloud is technically the third largest vendor, followed by Google Cloud and Alibaba Cloud.

Final thoughts

There’s no denying that IBM is lagging behind in cloud computing, or that it could have done a better job of migrating start-ups to a scalable infrastructure. We think IBM is grossly undervalued, and a lot of IT predictions tend to ignore the big blue.

We anticipate that investors will eventually recognize IBM’s resurgence as a major cloud provider. That doesn’t mean IBM will be for everyone, but when it comes to Linux / Unix-based servers and its unique catalog of services and solutions, very little is missing. In addition, we are finding that some of IBM’s software for Advanced Computing, Supercomputing, Advanced AI, and Data Science are highly differentiated from other vendors.

This might seem incredible considering the weak stock market performance from 2011 through 2021. But, we expect the stagnation period at IBM to start to thaw, and unlike other big tech companies that are trading at insane valuations. , we believe that IBM’s rather pedestrian 23x earnings multiple is paired with its 4.72% dividend yield, making it attractive to value investors.

There is no expectation of significant sales growth over the foreseeable 10-year period, so if there is a sleeper of any action against the tide, we think IBM could be this counter-current action that surpasses other major technologies.

Disclosure: Cho Research was not paid by IBM to publish “IBM’s cloud transition could reverse a decade of stagnation”Although Cho Research uses the research dollars it
generates from other clients of our research service to finance market studies
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in this report may constitute forward-looking statements, such statements
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