Is IBM Stock Out Of The Woods Post Q3? International Business Machines Corp.

  • Q3 was a relief for IBM in many ways, but the market failed to see the gains made.
  • Strategic Imperatives - specifically Cloud and Analytics - are showing strong growth.
  • But will that be enough to push IBM back to YoY growth in the following two quarters?

International Business Machines' (NYSE:IBM) third quarter earnings must have been a huge relief for the company, which has been under immense pressure to show something substantial to investors. IBM embarked on a journey to reform itself by increasing the high-margin revenue streams. It has done away with old business lines, as the company has been under a continuous phase of revenue decline since 2011.

But things have finally started to change. As you can clearly see from the chart below, the pace of IBM’s revenue decline has come down from double-digit rates to nearly zero during the third quarter of 2016. The rate of revenue decline massively slowed down in the last five quarters, and I strongly believe that next quarter could end up being the crucial indicator on how things are going to pan out over the next two years.

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Naturally, the question now will be: Can the company show steady growth in the next few years? Or did they just get lucky in this quarter? If it was an anomaly then it would have been just a minor spike - a sudden jump in top line numbers and then back to old levels. But what we have here is a trend, so let’s take a closer look at the underlying numbers behind the trend.

IBM changed its reporting structure this year, to make it easier for us to focus on the growing parts of the business rather than the ones that were slowing things down for the company. The company called this activity grouping Strategic Imperatives. During the first quarter of the current fiscal, this grouping that includes Analytics, Cloud, Mobile, Security and Social units made $7 billion, accounting for approximately 37.43% of its total revenue for that quarter.

Also Read : IBM Stock: Things To Watch Out For During Q3 2016 Earnings Of International Business Machines Corp. (IBM)

Clearly, this was the business group that showed upward momentum, and IBM made sure that this grouping was highlighted this year. During the third quarter, Strategic Imperatives’ total sales moved to $8 billion, accounting for approx. 41.66% of their total revenues for the quarter.

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With most of the above product lines using cloud as their delivery mechanism there is a significant overlap in the numbers, but we can clearly see that Analytics and Cloud are growing fast despite being the heavy hitters in this group of business units. The most interesting part of the above table is the way Cloud-as a-service has moved from a run rate of $5.4 billion in the first quarter, to $7.5 billion in the third quarter. And on a year-over-year basis, this segment is showing above 46% growth rate in the last three quarters.

Also Read : Oracle Stock: Will Oracle Corporation (ORCL) Execute Its Cloud Strategy In Time?

That’s a major achievement in itself, but when you compare that growth with what we’re seeing at Amazon Web Services and Microsoft cloud, you can see that IBM is growing in line with its cloud competitors. All three companies are growing their cloud revenues at around the 50% level year-over-year. Things are indeed finally shaping up nicely at IBM, and I strongly believe that Analytics and Cloud are the two strategic imperatives that will drive IBM's future growth. The next two quarters will tell us how strongly these two strong units are able to support revenue growth, and exactly when IBM’s revenue growth train will start consistently moving North once again.

Also see: Amigobulls' latest top technology stock picks.

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  • I do not have any business relationship with the companies mentioned in this post.
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