IBM (NYSE:IBM) Stock a Buy: Changing Strategy to Focus on Cloud Business

The business world moves at light speed these days. Many companies that once were known as industry leaders have had to adapt to new trends or face becoming irrelevant in the eyes of investors. Take IBM NYSE: IBM for example. It’s a business that was once the gold standard in the Information Technology sector but made several missteps in the past that led to multiple years of revenue declines. Slowing software sales and decreasing demand for mainframe servers put the company at a critical crossroads in its storied history.

Now, the tech giant is shifting its 109-year-old business model towards cloud computing and artificial intelligence. IBM announced that it will spinoff its legacy managed infrastructure business to focus on growing its high-margin cloud computing segment. This is a major move that could help IBM get back to its glory days. Let’s take a deeper look at the move below and evaluate why IBM could be a good buy after the big shift in strategy.

Powerful Pivot

International Business Machines, also known as “Big Blue”, is a technology company that needed a change. While major tech competitors have adjusted their business models to the times and seen their stocks reach new all-time highs, IBM has posted consistently declining revenues for years. That’s why the recent news could be such a strong catalyst for the stock. The move to spin off the company’s managed infrastructure services will allow IBM to get rid of a major part of its business that is seeing decreasing sales to focus on the high growth and high margin area of cloud computing.

The company recently appointed Arvind Krishna as its new CEO as part of a plan to create a more focused business model. Mr. Krishna recognized that recurring cloud revenue and artificial intelligence are the best way for the company to move forward. So many companies are interested in cloud technology because it allows them to rent data storage space instead of spending a fortune on physical hardware. With IBM’s slowing software sales and a mainframe server business that sees a lot of ups and downs, this powerful pivot to the high growth cloud sector might be just what Big Blue needs to usher in a new era of success.

What is Happening to the Infrastructure Services Business?

You might be wondering what exactly will happen to IBM’s infrastructure services business after the spinoff is completed. After all, the managed infrastructure services business saw roughly $19 billion in sales last year along with a current backlog of $60 billion. The spinoff will result in a new public company with the working title of “NewCo” and could allow for nice synergy between IBM.

According to IBM, NewCo will own the entirety of IBM Global Technology Services’ existing clients that includes 4,600 accounts and roughly 75% of the Fortune 100. With 90,000 employees, NewCo will offer things like network services, cloud migration services, and infrastructure updates to companies around the globe. The move should be officially completed by the end of 2021 and will allow IBM to partner across all cloud vendors, which could help the company boost earnings going forward. To quote Mr. Krishna, “NewCo will have greater agility to design, run, and modernize the infrastructure of the world’s most important organizations”.

Heading to the Cloud

Investors are excited about the announcement, as IBM shares rose about 6% in the trading session following the news. The large tech company already made a huge bet on cloud technology by acquiring Red Hat for $33 billion back in 2019 and the latest announcement tells us that IBM is fully committed to creating cloud and artificial intelligence solutions. If you look the cloud software companies that have performed so well in the market lately, it’s easy to understand why investors should be excited about this move.

IBM claims that there is a $1 trillion market opportunity in the hybrid cloud space. If you aren’t familiar with the term “hybrid cloud”, it means that IBM will offer public and private cloud services, which allows companies to benefit from additional network security. The company is already seeing growth in its cloud business, as IBM reported $6.3 billion in total cloud revenue in Q2, which was a 30% year-over-year increase.

Final Thoughts

This news is certainly intriguing for investors interested in stocks that provide exposure to cloud computing and artificial intelligence. While IBM stock was up considerably in the trading session following the announcement, the stock is still down about 3% on the year and could be a smart buy in the coming weeks after the market digests the big news. There’s also the 4.96% dividend yield that makes IBM stock a nice pick for dividend investors that are also interested in growth potential.