Still a Buy: IBM (NYSE:IBM) Results Make it Clear the Company Is Worth Picking Up

A little over a week ago, we asserted that IBM (NYSE:IBM) was worth a buy thanks to its recent moves to adjust its strategies and focus on its cloud business. As IBM rolls out its numbers for the quarter, we discover that that assertion was quite thoroughly correct, and IBM remains still worthy of a buy and an addition to your portfolio.

A Shift in Focus Can do Wonders for the Numbers

The good news out of IBM's earnings call was readily apparent; third quarter revenue came out ahead of forecasts. While analysts were projecting the company would come out with $17.5 billion in sales, IBM managed to post $17.6 billion. This was tempered somewhat by the unfortunate news that this represented a 2.6% decline in sales overall, but given where the decline had emerged, the impact of the news was a bit less pressing.

The divisions that saw losses were the Global Technology Services and Global Business Services arms. Technology saw a 3.6% drop in its numbers, and Business slipped a substantial 4.7%. That's not good news by any stretch, so why in the world is this company still a buy?

The answer to that lurks in the figures of IBM's cloud revenue statistics. With Red Hat leading the way, the cloud revenue figures for IBM were up 19%. Red Hat itself generated at 17% jump in sales, and now, IBM's cloud revenue figures stand at $6 billion. That led to word from Nucleus Research, whose analyst, Daniel Elman, noted that this quarter is one of the last where IBM's legacy operations will be involved to drag on the numbers being put out by the wildly popular cloud division.

Not All Smiles and Skyrocketing AI Numbers

While the cloud numbers were amazing, the rest of the numbers didn't exactly impress, as we've seen already. Jim Kavanaugh, the company's chief financial officer, noted that the pandemic was continuing to drag down IBM's numbers somewhat as well. Essentially, Kavanaugh pointed out the overall speed of recovery from the disaster of the second quarter has been irregular at best, with some sectors gaining much faster than others. That's left overall demand on the back foot, as companies struggle to figure out their new business models in a market that can, apparently, be shut down at any time by government mandate.

However, the company's latest moves should help drive further gains, as IBM puts more focus beyond comparatively pandemic-proof product lines like artificial intelligence (AI) and cloud-based systems. Cloud has, not surprisingly, gained a lot of ground in the midst of the growing work-from-home movement.

A Move to the Cloud, or Its Head in the Clouds?

With IBM divesting its older businesses into the NewCo brand, and putting its focus behind clear growth sectors, it would be enough to make most think that IBM is, indeed, the quality buy we projected it to be. Our latest research suggests there's a bit of hesitation on that front among analysts, who collectively have a “hold” rating attached to the stock.

The overall numbers haven't changed much in the last six months; 180 days ago, we were at 12 “hold” and five “buy” ratings, but now, we're at 10 “hold” and six “buy”. The price target, however, has been trending merrily upward—with a bit of a hiccup—in that same span, going from $134.64 to $140.07.

Basically, we're seeing a company looking to get out of one business that's less than profitable—nearly any business that can be described with the term “legacy” is at best a niche market, because there's only so much use of “legacy” anything—and focus much harder on a business that's delivering double-digit increases in an overall economic picture like this one. The numbers are clearly supporting such a move, and as IBM moves away from the legacy lineup and expands its focus on things like Watson and cloud tools, the numbers are likely to continue improving.

It may be a bit hard to think of IBM as dynamic, but the company is proving that it too can roll with the punches and come out the other side. As IBM expands use in proven profitable sectors, and those sectors likely keep up brisk demand as the work-from-home movement keeps going, this should be a very rewarding investment for those who join IBM in the next chapter of its business life.