Although IBM posted what most would consider a down year in 2013, I believe the company is headed in the right direction. I'd consider myself slightly more bullish than most with IBM, as the current average rating for the stock by its analysts is a hold. There's a couple key reasons as to why I think IBM could push past analysts' expectations, and I'll show you the reasons in this article.
IBM's Target Segments
Moving out of what could be considered a slightly disappointing 2013 campaign, IBM is targeting improvement with strategies in 3 key business segments. These segments are data, cloud computing, and systems of engagement. This new strategy looks to improve upon IBM's failure to fully capitalize on new tech growth segments in the prior year.
IBM considers data as the world's new natural resource. There will be an estimated 1 trillion connected objects and devices on the planet generating data by 2015, and there are currently 2.5 billion gigabytes of data generated every day. 80% of this data is currently unstructured and un-analyzed. The potential that lies within this data is huge and IBM is acting accordingly, with 2/3rds of all research dedicated to data, analytics, and cognitive computing. Companies that can use data efficiently and effectively have a competitive advantage over their competition. IBM is the company that enables other companies to gain this increasingly necessary advantage over competitors. IBM has the world's broadest and deepest portfolio in data and analytics, and the revenue from the segment has increased to 16 billion from 11 billion in 2010- a strong trend that I expect to continue to grow.
The cloud and cloud computing is arguably one of the biggest trends in the tech industry today. IBM estimates that 1/4th of the world's applications will be available in the cloud by 2016. This proportion leaves a lot of room for growth in the future. If you look at your own devices that you currently use every day, I would venture to guess that a large portion of them are able to or frequently use the cloud. This is why I like this part of IBM's strategy so much- 80% of the Fortune 500 companies rely on IBM's cloud capabilities to do business. IBM has 1500+ cloud patents and also has 15 new cloud market expansions in the works for 2014. Cloud revenue grew an impressive 69% in 2013. In addition to this impressive growth number, cloud service revenue also doubled for the year. The signs all point in one direction for IBM's cloud business segment- and that direction is up, potentially into the clouds.
Systems of Engagement
IBM's systems of engagement segment is composed of social media, mobile, and security software, products, and solutions. To me, it's pretty obvious that this segment should be expected to grow- social media and mobile devices are things that almost everyone partakes in and uses. With that being said, the need for security on all of our mobile devices and devices in general is becoming more and more prevalent and on everyone's mind- think of the Target security lapse of late. With more CEOs and companies worried about securing their businesses and information, they're going to turn to a well-known name like IBM. This could be a key reason as to why IBM has seen a 19% growth in security to go along with a 69% growth in mobile for 2013. Moving forward, I expect to see the numbers for security go up even further.
Food for Thought
Make what you will of IBM's numbers, recent performance, and analyst ratings, but there's one thing that shouldn't be overlooked- IBM's dedication to returning cash/value to shareholders. The company has seen both steady increases in pre-tax income margin and free cash flow over recent years. Since 2002, IBM has used more cash on net share repurchases than any other venture- $108 billion out of a total $170 billion. $30 billion of this money has also gone towards dividend increases, a key reason why IBM has raised their dividend for 18 straight years and 12% for 2013. On top of this, the company has a target value of $20 in operating EPS for 2015, and is well on pace to meet this mark. IBM also has told investors to expect $18 by the end of 2014, which is a mark that is predicted to be eclipsed easily. There also has been steady growth in EPS each year since 2002. All of these things will add more value to investors, giving stronger reasons to buy.
Source: IBM 2013 Annual Report
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.