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The Cloud Is Increasing its Coverage

27 January 2014 in Trading Ideas

Tech-centric throngs will be gathering next week in Orlando for the IBM Connect conference, a confab with a straightforward enough mission: “The combination of social, collaborative and mobile technology infused with behavioral science and analytics is incredibly powerful ,” the conference’s web site states, “especially when it is delivered in the cloud. IBM Connect will provide you insight on how to apply these principles to your business.”1

Would now be a bad time to point out the irony of IBM touting the very technology that seems to be wreaking havoc on its own bottom line?

The company’s earnings report earlier this week disappointed investors after news that fourth-quarter revenue fell 5.5%. That was below expectations and marked the seventh consecutive quarterly drop for Big Blue.2

Even worse, the company’s hardware group plummeted 27%. As the Wall Street Journal reported, that unit – which houses computer servers, storage gear, and computer chips – is struggling to respond to technological advances such as cloud computing, where customers rent computing power and software via the Internet.

IBM has been forced to make forays into new technologies like the cloud (would they really throw this conference otherwise?) and data analytics, but the company has conceded that it hasn’t offset its overall hardware sluggishness.

The development isn’t necessarily the biggest surprise. Last October, Barclays analyst Ben Reitzes cut his price target on the stock to $190 from $215, in part due to the threat of cloud computing.3

As Reitzes put it, “Each dollar spent in the public cloud arguably means that multiple dollars are not spent at multiple corporations to duplicate that capability on premise. That’s why rather small projections have an out-sized impact and we believe the cloud is really driving the demise of hardware, services and software revenue throughout IT, including IBM.

“With each customer that deploys a SaaS application or utilizes IaaS technology, future revenue streams from IBM become more difficult to tap.”

That’s a bit of a glum outlook, although it should be noted Seitzes also added that IBM has finally realized the potential of the cloud and expects the company to better compete down the road.

However, compare that view with the one recently handed out to virtualization-software maker VMware, which also holds a 15.5% weighting in the Cloud Computing motif. Citigroup analyst Walter Pritchard slapped a buy rating on the stock and raised his price target to $120 from $87, saying that the growth trends seen by the company in the latter half of 2013 were sustainable into 2014.4

Particularly noteworthy was Pritchard referencing – a Citi survey of chief information officers, which found that the number of CIOs saying they would spend more with VMware “far outstripped” than any other vendor, including the company at No. 2 – Microsoft.

Investors interested in cloud computing stocks will need to decide to what degree that ranking effectively crystallizes the new direction for technology.

The Cloud Computing motif has gained 7.6% in the past month; the S&P 500 is up 1% during that same time frame. In the past 12 months, the motif has risen 26.4% and the S&P 500 has gained 26.2%.

1IBM Software Connect 2014, http://www-01.ibm.com/software/collaboration/events/connect/.

2Spencer E. Ante, “IBM’s Hardware Woes Accelerate in Fourth Quarter,” WSJ.com, Jan. 21, 2014.

3Tiernan Ray, “IBM: Barclays Cuts to Hold; Cash Flow Lackluster, Cloud Computing Threatens,” barrons.com, Oct. 7, 2013.

4Tiernan Ray, “Citi Ups to Buy on Enterprise Enthusiasm, Waning of Open Stack Threat, Jan. 16, 2014.