Not the IBM Stock You’re Used To
It seems like International Business Machines Corp. (NYSE:IBM) is reinventing itself yet again. Markets have clearly taken notice, which should help explain the recent surge in IBM stock. The share price is up 36.28% from its February lows.
That kind of growth is not what you’d normally expect from an old giant like IBM. Most investors only glance at IBM stock when they’re looking for a dividend yield, not when they’re hungry for double-digit capital gains.
Nonetheless, IBM stock was on a tear for the first half of the year. The company has been signing partnerships left and right, expanding its business and reorienting itself for the years to come. The recent deal with Pratt & Whitney is a perfect example.
This Could Be Big for IBM Stock
Pratt & Whitney is a subsidiary of United Technologies Corporation (NYSE:UTX), the major aerospace and defense contractor. Pratt & Whitney builds turbine engines and the like. For approximately two years, the company has been using IBM’s “Big Blue” analytics to monitor its manufacturing systems. (Source: “Pratt & Whitney Moves to the IBM Cloud to Fuel Growth,” International Business Machines Corp., July 12, 2016.)
Production is expected to double over the next four years, so Pratt & Whitney executives decided to migrate the company’s enterprise systems to IBM’s cloud. Rather than have an inelastic, inflexible software infrastructure, Pratt & Whitney is deciding to go the 21st century route.
It is an unbelievably smart move and one I suspect other companies will imitate. By using cloud-based software, Pratt & Whitney can “manage, analyze and grow its infrastructure dynamically to accommodate the company’s growth.” (Source: Ibid.)
All that is fine and dandy, but I’m really interested in what this means for IBM stock.
Is this what’s been driving the share price? To put it simply, yes. The pivot to cloud-based services is the biggest internal shift at IBM. It has led to massive lay-offs and restructuring, but I think it’s exactly what the company needed to do.
IBM has deep roots in the global business community; its IT services were a staple in business districts worldwide. That doesn’t mean customers would stick by IBM forever, though. Time was running out for legacy tech businesses like IBM.
Fewer clients were willing to pay for the inconvenience of physical technology being installed on their premises. This isn’t 1998 after all. Why would any company be eager to devote office real estate to servers and other tech? There are too many alternatives these days.
In other words, cloud computing was killing IBM’s entire model. There was a ton of damage to IBM stock, but the company is finally taking action. It took a few years of declining revenue, but it chose to get aboard the cloud computing train rather than let the train crush the company.
IBM slashed 5,000 jobs in March and then announced another round of cuts in April. By the end of the purge, more than 14,000 jobs will be eliminated. Most of these positions will come from IBM’s legacy business, but there will be jobs added too, of course. (Source: “IBM Layoffs Continue,” The Wall Street Journal, May 20, 2016.)
The company says it has 20,000 jobs listed as available, even though others contest that number. Two current employees say the firm only has 7,000–8,000 openings worldwide.
Regardless of the specifics, the main point is that IBM has changed. It’s clearly in the middle of a dramatic turnaround, with the company even closing its 70-acre facility in Somers, New York. Although most of the staff there will be moved to the new campus at North Castle, New York, it seems like the start of a new beginning for IBM.
The Bottom Line on IBM Stock
From my vantage point, it looks like the company has rediscovered innovation—or rather what innovation looks like—not to mention its existing ties with Fortune 500 companies makes IBM a unique play in the cloud-computing space.
In short: IBM stock is definitely worth a second look. This isn’t the dusty old IT company you may think it is.