IBM Earnings: What to Look For and What to Ignore
The focus of many IBM investors is likely to be on 2013 Q4 and year-end earnings when it releases financial results after the close today. For IBM bulls, the hope is that revenues will keep pace with its strong operating margin and earnings posted last quarter. And if it happens, that would be nice for IBM shareholders and make for some great headlines. But investors would be wise to look beyond IBM's total revenues and analyze cloud-related sales to accurately assess IBM's future prospects.
Why? Because IBM is positioning itself for what it envisions as a "20-year trend": the shift of businesses and governments to the cloud. CEO Ginni Rometty made it clear after announcing Q3 earnings in October that IBM is focused on growing its "cloud, mobile, business analytics, and security" businesses, and last week's $1.2 billion commitment to expanding its number of cloud data centers confirmed her intention.
Commitment to the cloud
The day IBM announced it was buying privately held cloud-solutions provider SoftLayer for a reported $2 billion this past summer, its stock was trading at more than $206 a share. Today, as investors await its most recent earnings results, IBM is meandering around $190 a share. Near term, IBM's steady decline in stock price might seem a bit depressing, but that mind-set doesn't do Rometty and her ability to execute IBM's transformation justice.
IBM's objective to become the cloud provider of choice, a market some say could reach as high as $200 billion over the next six years, isn't simply rhetoric -- as the SoftLayer acquisition and $1.2 billion cloud data center investment will attest. And those are just the latest investments in cloud services. IBM has spent more than $7 billion to acquire cloud technologies and companies the past six or seven years, and if last quarter's 70% jump in cloud revenues is any indication, those investments are beginning to pay off.
With its latest outlay, IBM will boast 40 cloud-data centers around the globe by 2014 year-end, which is up from its current 25. And the integration of SoftLayer technologies is expected to be the basis for most IBM cloud-related solutions, once again demonstrating the value of last summer's $2 billion investment.
Managing, and ultimately manipulating, all the data that will soon pass through the cloud is another, largely untapped, opportunity that IBM is preparing to take advantage of. As noted in a previous article, IBM recognizes the revenue potential of big data and business intelligence (BI) solutions, which explains its recent $1 billion investment to set up the new Watson Group. IBM intends to align its "cognitive" computing big-data services, like its Watson supercomputer, with its suite of cloud tools.
Further evidence of Rometty's laser-focus on new, high-growth markets like cloud computing are rumors that IBM and Lenovo are back at the negotiating table discussing the sale of IBM's low-end server business. IBM paring down its computer hardware business? This is clearly not your father's IBM, nor should it be.
Final Foolish thoughts
Much of the news today surrounding IBM will be related to its earnings announcement; no surprise there. It also won't be a surprise that many investors will focus on total revenues, and that's where the opportunity lies. Annually, just as was the case last quarter, IBM revenues aren't likely to overly impress as it struggles with declining hardware revenues in its systems and technology business unit.
But that's not what midterm investors should focus on when analyzing IBM's growth prospects. For IBM, it all comes back to objective number one: dominating the exploding cloud market, and that will take some time. At this point in its transition away from hardware and into cloud and big-data solutions, IBM top-line results have kept some investors on the sidelines -- and that's the opportunity.
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The article IBM Earnings: What to Look For and What to Ignore originally appeared on Fool.com.
Fool contributor Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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