When Arvind Krishna became chairman and chief executive of IBM (IBM) in April 2020, he immediately prioritized building what the company calls an open, hybrid cloud platform. This expansion also focused on artificial intelligence technology. So is IBM stock now a buy?
A hybrid cloud architecture means IBM can provide its customers with both a public cloud and a private cloud, which gives a company extra network security. They share data and applications between them. Krishna sees this as a $1 trillion market opportunity.
In 2020, IBM completed seven acquisitions at an aggregate cost of $723 million. It reported three more acquisitions in the first quarter for an aggregate cost of $987 million.
In total, since Krishna became CEO in April 2020, IBM has announced more than 11 acquisitions. All are hybrid cloud and AI-focused, reflecting Krishna’s commitment to strengthen IBM’s hand and reshape its future.
Best Revenue Growth In Three Years
The results of this transitional shift are now showing up. IBM beat Wall Street estimates when it reported second-quarter results on July 20, showing its best revenue growth in three years. It was also IBM’s second quarter in a row of revenue growth, following years of declining revenue. IBM stock climbed about 4% on the news.
For its second quarter, IBM reported adjusted earnings of $2.33 a share on revenue of $18.7 billion. Analysts expected the tech giant to report earnings of $2.31 a share on revenue of $18.3 billion, according to FactSet.
Total cloud revenue in the quarter climbed 13% to $7 billion. Cloud computing is now 38% of total IBM revenue. Moreover, cloud revenue over the last 12 months reached $27 billion, up 15%.
“The overall spend environment continues to improve,” Krishna said in a conference call with analysts. “ With the economy reopening in many parts of the world, many markets and industries are getting back on track. We see this in North America and in select industries.”
Spending $120 Billion To Remake IBM
The major shifts in business operations help to explain why growth in revenue and earnings has been a struggle. Over the past decade, IBM has invested more than $120 billion in remaking the company. This includes $29 billion in capital expenditures, for things like scaling its cloud operations and artificial intelligence offerings and bolstering its security and services capabilities.
IBM is also in the process of spinning off its $19 billion managed infrastructure business. That will allow IBM to focus more intently on cloud computing and artificial intelligence. The business unit, called Managed Infrastructure Services, will be spun off into a new public company named Kyndryl. It helps companies manage their technology infrastructure. The spinoff is expected to be completed by the end of this year.
Kyndryl will focus on managing and modernizing client-owned infrastructures, a $500 billion market opportunity. It will provide hosting and network services, infrastructure modernization, and cloud migration services.
Acquiring Hybrid Cloud, AI Companies
The rising star at IBM is its Cloud and Cognitive Software business unit. It provides a variety of cloud computing services, data and transaction processing platforms. It also includes what IBM calls cognitive applications, which is another term for artificial intelligence. Krishna was previously senior vice president for IBM’s Cloud and Cognitive Software business.
It’s also where IBM’s $34 billion deal to acquire Red Hat was placed. Red Hat provides an open source, cloud software business. It was key in IBM’s massive expansion into offering a hybrid cloud architecture to its customers and should support IBM stock.
Following IBM’s second-quarter earnings report, Morgan Stanly analyst Katy Huberty raised her price target on IBM stock to 164, from 152, and maintained a rating of equal weight.
“Results indicate an improving demand environment and stronger execution,” Huberty wrote in a note to clients.
Technical Analysis Of IBM Stock
A technical analysis of IBM stock is a key component of determining whether the shares are worth buying.
The IBD Stock Checkup Tool shows that IBM has a weak IBD Composite Rating of 54 out of a best-possible 99. When choosing stocks for the biggest potential gains based on the CAN SLIM investment paradigm, focus on those with a Composite Rating of 90 or higher.
Along with its low Composite Rating, the stock has a weak Relative Strength Rating of 52. The rating means that IBM stock has outperformed 52% of all stocks in the IBD database over the past 12 months. The best stocks will often rate over 80 at the time they launch a big price run.
Also, IBM’s relative strength line has been trending upward, a positive sign. It tracks a stock’s performance vs. the S&P 500 index. Typically, the RS line of the strongest stocks is either confirming or leading a stock’s price into new high ground.
Is IBM Stock A Buy?
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Please follow Brian Deagon on Twitter at @IBD_BDeagon for more on tech stocks, analysis and financial markets.
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