How IBM Cloud Can Boost Its Revenues?

The stock price of International Business Machines (NYSE:IBM) has fallen 22% since its July high of $173 to $135, compared to a 1% decrease of 6% in the S&P 500 index during the same period. IBM’s subpar stock performance reflects investor sentiment, which has weakened as the company’s revenues have been on a decline. However, the recent efforts by the company to roll out its services on cloud is hampering its revenues  but positively impacting its margins.

The company continues to focus on big data analytics and cloud computing services. This strategy is yielding results as the company is witnessing robust growth in revenues from these initiatives, especially in its Watson Analytics offering. Furthermore, its application offering  is gain traction in the Software-As-A-Serivce (SaaS) market. In this article, we discuss key factors that contribute to our belief in IBM’s long-term potential in Cloud.

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Revenues From Cloud Services To Bolster GTS And GBS Businesses

Cloud services are transforming business solutions globally and companies are leveraging technology to offer new and improved services across traditional and new channels. IBM has spent billions of dollars building its cloud business globally with a number of acquisitions in 2015 that include Clear Leap, Merge Healthcare Inc., Gravitant, Inc., StrongLoop, Inc., Blue Box Group, Inc., Explorys, etc.

According to IDC, the cloud IT Infrastructure Market was forecast to grow 24% year over year in 2015 to $32.6 billion, driven by Public Cloud Datacenter expansion. For the five-year forecast period, IDC expects that cloud IT infrastructure spending will grow at a compound annual growth rate (CAGR) of 15.1% and will reach $53.1 billion by 2019. ^[1] The research firm also predicts that  cloud software will grow to surpass $112.8 billion by 2019 at a compound annual growth rate (CAGR) of 18.3%.  ((Worldwide SaaS and Cloud Software 2015–2019 Forecast and 2014 Vendor Shares, August 2015, www.idc.com)) Furthermore, IDC’s report states that SaaS delivery will significantly outpace traditional software product delivery, growing nearly five times faster than the traditional software market. According to IDC estimates,  the cloud software development  model will account for $1 of every $4.59 spent on software by 2019.

IBM’s technology services (GTS), which includes integrated technology and maintenance  services for infrastructure, and global business services (GBS) divisions, together make revenues of nearly $55 billion and account for 27% of its estimated value. We project that the revenues  declined to $48 billion in 2015 as cloud subscription model pushed expected revenue over a greater interval of time. That said,  IBM’s cloud initiative reported growth of over 70% . IBM projects that cloud services will generate $7 billion in revenue in 2015, but we estimate that the top line will be meaningfully higher due to the acquisitions and initiatives that IBM has undertaken in the past few years. We expect that most of the gains in GTS and GBS revenues, which are expected to decline as traditional deployment mechanisms give way to the cloud,  in the future will come from growing cloud services.

Furthermore, IBM has carefully maneuvered itself into the next wave of tech growth that relies heavily on big data analytics. Its cognitive computing system, Watson, is catering to cloud-based big data analytics. Given the need for sophisticated BI tools and the increasing usage of high performance data analytics in the coming years, IBM stands to make good money from its Watson Analytics solution. ^[2] Considering these efforts, if IBM captures 10% of  Cloud infrastructure and software revenues, it can make around $16.5 billion in revenues by 2019.

We currently have a $154.19 Trefis price estimate for IBM which is about 10% higher than the current market price.

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1. IDC Forecasts Worldwide Cloud IT Infrastructure Market to Grow 24% Year Over Year in 2015, Driven by Public Cloud Datacenter Expansion, 05 October 2015, www.idc.com [↩]
2. Read How Watson Can Boost IBM’s Topline [↩]