Probably no one would like to put 2014 in the rearview mirror more than IBM CEO Ginni Rometty, who will have been at the helm for three years as of Jan.1, 2015.It's been anything but smooth sailing for IBM investors, and this year has been a microcosm of the challenges Rometty and team continue to face.
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Money-losing, and margin-sapping business lines, along with declining revenue and earnings, have driven IBM's stock down over 12% year to date, even as one of its primary competitors --Microsoft -- has enjoyed a nearly 30% pop in share price. Clearly, investors are becoming impatient with IBM's turnaround efforts, which makes 2015 critical for both shareholders and Rometty. But before investors throw in the towel, they should look to a few crucial markets;if IBM can perform here, 2015 could be a return to glory.
Perception is reality, in the short term
For years, IBM and Microsoft worked primarily on opposite sides of the same fence. While both tech behemoths were tied to the PC market, IBM focused much of its efforts on the hardware and enterprise side of things, while Microsoft was more than happy to provide the software for seemingly every computer on the planet. But as the PC market shifted to mobile, IBM and Microsoft were left holding the proverbial bag.
These companies needed to catch up to the realities of a new tech marketplace, and fast. Neither has completed the transition, which isn't surprising considering that IBM has $162 billion in market capitalization and Microsoft is nearing $400 billion. Companies of those sizes don't change strategic businesses, or cultures, overnight. And it's here the two longtime tech leaders diverge.
Microsoft's change in leadership earlier this year, replacing CEO Steve Ballmer with Satya Nadella, was correctly hailed as a step in the right direction. Nadella has Microsoft hitting on all cylinders, with outstanding results in new, key markets, including cloud computing growth of 128% last quarter, and a successful launch of the Surface Pro 3 pseudo-tablet. Nadella's efforts to align Microsoft with the "new" tech industry have driven the company's share price appreciation.
IBM is also working to become a leader in cutting-edge technologies including cloud computing and security, Big Data, mobile, and business intelligence (BI) solutions. One distinction between the two companies is IBM has less to show for its transition efforts to what Rometty calls "strategic imperatives," while Microsoft is exceeding expectations. The other difference has less to do with results, and more to do with perception, which has opened a window of opportunity for investors in 2015.
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What really matters
Even accounting for 2014's stock performance, execution by Rometty and team on IBM's strategic imperatives makes the company worth considering for long-term investors. That, and that alone, will determine if IBM makes it through the rocky road it has been traveling, and strides are being made.
Beyond IBM's top-line underperformance last quarter there are signs of positive momentum in key areas. For example, as of last quarter, revenue from IBM's cloud delivered as a service was tracking at an annual run rate of $3.1 billion, up 80% for the year. That puts IBM alongside Microsoft as one of the leading cloud providers. Meanwhile, BI revenue was up 8% year over year last quarter, security-related sales jumped over 20%, and mobile-related results more than doubled.
IBM is also likely to dominateBig Data, a market expected to generate about $50 billion by 2017. IBM's Watson supercomputer now occupies its own business unit, after the company invested over $1 billion earlier this year to ramp up its Big Data efforts delivered, naturally, via the cloud.
Toss in new cloud centers around the globe and shedding money-losing businesses to better align the company with key strategic imperatives, among other positive moves, and IBM is pointed in the right direction heading into 2015. If investors are willing to focus on what really matters -- IBM executing on its transition to new markets -- as they have with Microsoft, 2015 could prove to be a banner year.
The article IBM Stock: Here's Why 2015 Could See Things Turning Around originally appeared on Fool.com.
Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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