Is It Back To The future For IBM Stock?

IBM StockInternational Business Machines Corp. (NYSE: IBM) stock is undergoing a transition the likes of which it has not seen since Thomas J. Watson, Jr. was President and CEO of the company. According to IBM stock lore, “the ascension of Thomas J. Watson, Jr. to IBM’s presidency in 1952 marks the beginning of the company’s transition to a modern corporation.” (Source: “IBM Archives,” International Business Machines Corp., last accessed September 9, 2016.)

So, is it back to the future for IBM stock? IBM’s current chair, president, and CEO is Ginni Rometty, and she is leading the transformation of IBM from a hardware, software, and services company into a cognitive solutions and cloud platform company. So, is Ginni Rometty the next Thomas J. Watson, Jr.?

Is IBM Stock Undergoing a 21st Century Transformation?

Rometty has been President of IBM since 2012 and, in that time, IBM stock has declined by almost 15%. But, this masks IBM stock’s performance over the last seven months. Since February, IBM stock is up 36%. So, is this the start of a trend?

Transition is tough and the numbers don’t lie. At the end of IBM’s 2012 full year of operations, revenues were roughly $104.5 billion and earnings per share (EPS) were $14.53. At the end of last year, revenue totaled $81.7 billion and EPS came in at $13.48. So, since Rometty has been at the helm of IBM, revenues have fallen by nearly 22% and earnings are off by some 7% (Source: “International Business Machines Corporation (Filer) CIK: 0000051143,” U.S. Securities and Exchange Commission, last accessed September 9, 2016.)

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Here’s the thing. It was only last year that Rometty’s IBM launched a new set of “strategic imperatives” that fully defined Rometty’s vision of what she wants IBM to be going forward. And only at the beginning of 2016 did IBM stock change the way it reports segments to better align financial reporting with those new “imperatives”.

What Are The “Strategic Imperatives” For IBM Stock?

IBM’s first strategic imperative is to focus its resources on artificial intelligence (AI). IBM defines this as “Cognitive Solutions.” And it’s interesting to note that in 1952, IBM scientist Arthur L. Samuel was a pioneer in AI research. So, is it back to the future for IBM innovation? And, will it be back to the future for IBM stock performance?

IBM’s second strategic imperative defines the cloud as the path to new business models, and IBM management calls it their “Technology Services” and “Cloud Platforms” business. The third imperative is a legacy business for IBM, and one that they pioneered in the 1950s. This is their “Global Business Services” unit, which includes consulting, global process services, and application management. Likewise, their “Systems” business is also a legacy unit and includes systems hardware and operating systems software.

The final strategic imperative is “Global Financing,” a business they have been in for more than 60 years, and includes financing new systems and selling used ones. (Source: “2015 IBM Annual Report,” International Business Machines Corp., February 23, 2016.)

The Bottom Line on IBM Stock

For the quarter ended June 30, 2016, revenue from IBM’s strategic imperatives was about $8.3 billion. That was about 40% of total revenue, and, to me, suggests that Rometty’s plan is creating meaningful, demonstrable, positive change. Within that newly segmented revenue we saw that IBM’s “Cognitive Solutions” business grew at a healthy 3.5% clip. To me, it feels as if IBM’s strategic imperatives are beginning to take root. And IBM appears poised for meaningful growth, which could bear fruit for those who own IBM stock.