International Business Machines Corp IBM recently announced that its cloud platform, has been chosen by American Airlines Group Inc. AAL to enhance its enterprise scalability, flexibility and reliability.
The move will not only enable American Airlines to switch some of its enterprise applications to the cloud but also allow it to leverage IBM Cloud’s global footprint that consists of more than 50 data centers across the world. Additionally, the airlines company will be able to take advantage of IBM Bluemix’s application development capabilities. To top it all, American Airlines will have access to IBM’s cognitive technologies that enable it to offer enhanced customer experience.
What this Means for IBM?
In third-quarter 2016, IBM’s total software revenue increased 3% year over year to $5.7 billion. Cognitive Solutions (solutions software and transaction processing software) revenues grew 4.5% year over year to $4.24 billion. Software solutions registered growth of 8%, driven primarily by analytics (Watson platform, Big Data, Information Integration). Cloud was up an impressive 74%.
With CEO Ginni Rometty’s “strategic imperatives” in place, cloud remains a key focus area for IBM’s revenue growth. Moreover, as per an IDC report, worldwide spending on public cloud services is estimated to reach $195 billion by 2020 that is currently growing at a CAGR of 20.4%.
These partnerships augur well for the company in the long run given the huge scope for cloud.
However, intensifying competition in the cloud space with the presence of major players such as Amazon.com, Inc.’s AMZN AWS and Microsoft’s Azure remain a concern for IBM going ahead.
Stock Performance Overview
We note that IBM’s stock price has underperformed the broader Zacks Computer Integrated Systems Industry over the last one year. While the stock generated a return of 18.83%, the sector generated a return of 27.89%.
The underperformance of the stock could be due to the ongoing and heavily time-consuming business model transition to cloud. Further, sluggish IT spending particularly on on-premise and data center hardware and foreign exchange volatility remain concerns. Moreover, intensifying competition in the cloud is a major headwind.
Nevertheless, IBM's strategic growth initiatives, including its Big Data & business analytics, cloud computing, mobile and social business are expected to drive growth in the future.
Zacks Rank and Key Picks
At present, IBM carries a Zacks Rank #3 (Hold).
A better ranked stock in the broader technology space is Diebold Inc DBD, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Notably, the consensus estimate for Diebold’s current year has remained stable at $1.20 over the last seven days.
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