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Summary

  • IBM is down this year, as its financial growth hasn't kept pace with analyst expectations.
  • IBM is currently undergoing a transition that is leading to short-term pains, but expects to bounce back once the transition is complete.
  • Given IBM's cheap valuation and its strategies, it looks like a good buy on the pullback.

International Business Machines (NYSE:IBM) is having an indifferent time this year. The stock is down around 2% in 2014, as the company has failed to impress the Street with its revenue numbers. Its first-quarter results were no different, with IBM reporting a year-over-year decline of 4% in revenue and 15% in earnings. IBM is feeling the pain of a transition in its business. As the IBM CEO pointed out after the last earnings report:

In the first quarter, we continued to take actions to transform part of the business and to shift aggressively to our strategic growth areas including cloud, big data analytics, social, mobile and security.

So, will IBM be able to turn around the business in the near future, and is it a good buy at its current valuation? Let's check.

Transition in progress

IBM is shifting its business model to focus on crucial growth areas, and transforming parts of its business. It recently announced an investment of $1.2 billion to expand its SoftLayer cloud hubs globally. IBM also introduced BlueMix, which is a new platform-as-a-service, in order to speed up deployment of its hybrid clouds.

Moreover, IBM acquired Aspera and Cloudant to extend its capabilities in Big Data and cloud. It's expanding its portfolio across OpenPOWER. Also, it has created an integrated business unit and announced an investment of $1 billion for bringing cognitive capabilities to the enterprise.

IBM is moving into growth areas, and is divesting businesses that no longer fit its strategic profile. In January, the software giant divested its customer care BPO business, and announced the sale of its industry standard server business to its partner, Lenovo. IBM also took a substantial charge to align its resources and skills to customers' demand profile. Many of these actions might impact its top and bottom lines in the short term, but are expected to reap long-term benefits.

This is the reason behind the decline in revenue and earnings, but the company expects to set this trend right going forward.

Beyond the short-term pain

IBM is seeing robust demand and impressive results in areas like mobile, cloud, and security, areas where it has started targeting its investments. It has expanded its cloud offerings, leading to an increase in the number of large outsourcing contracts signed last year, along with a strong performance in both consulting and systems integration. IBM is repositioning and promoting OpenPOWER, and has implemented actions across the power and storage segments to right-size the business according to the market's needs.

IBM, with its SoftLayer platform of Global Technology Services, provides a highly differentiated solution for clients looking to deploy solutions across public, private, or hybrid clouds, unified on one platform. It has seen good growth in enterprise transformation projects, and the introduction of BlueMix has proved to be quite popular among application developers.

IBM is seeing constant growth across cloud and business analytics, and has delivered excellent progress in projects for clients on systems of engagement and helping them connect new front-end capabilities to their back-end systems and processes.

Hence, it is no surprise that IDC ranked IBM the number one in Overall Business Consulting and Cloud Professional Services. Forrester rated IBM as the number one in Mobility Consulting Services, which is a good indication of its success in front-office transformations. The company is continuing to invest strategically, and had committed $100 million in March to expand its consulting services capability with 10 new IBM Interactive Labs to address client experience design and engagement.

IBM's enterprise clients are relying on its middleware solutions to transform their infrastructure, and handle their business-critical transactions delivered through a combination of on-premise and SaaS solutions.

In addition, the WebSphere brand of IBM delivered strong growth last quarter, increasing 12% year-over-year, followed by app server and mobile solutions. IBM is witnessing robust growth in MobileFirst, which is a comprehensive portfolio of mobile software and services that enables its clients to manage, integrate, and leverage mobile devices.

The software major has been building capabilities to address the mobile segment. The mobile business of IBM doubled from last year in the first quarter. In addition, its application server business also delivered robust growth for the fourth consecutive quarter. Gartner listed IBM as the market share leader in application infrastructure and middleware software for the 13th year in a row, and is believed to be nearly double the size of its closest competitor, with 30% market share.

Fundamentals and conclusion

Quite clearly, IBM is making solid progress to improve. Although the company is seeing a decline in its financials currently, it is trading at an enticing valuation. Moreover, given the positive moves made in the cloud, IBM can be a value play. Trading at a trailing P/E and a forward P/E of 12.42 and 9.18, respectively, the stock is cheap and there's earnings growth expected. Moreover, its trailing P/E is better than the industry's average of 20.27. So, IBM is indeed a value play, and investors should consider capitalizing on the stock's weakness to buy more shares.

Source: Is IBM's Weakness A Buying Opportunity?