Does IBM Have A Chance With The Open Cloud Adoption?

| About: International Business (IBM)

IBM (NYSE:IBM) has announced the plan to support the Kernel-based Virtual Machine Technology. The initiative is to speed up the adoption of the open cloud and the open virtualization network across the enterprise sector. In this article, I want to show how a rise in the global cloud IP traffic will enable IBM to increase its cloud division revenues by 1% with the new open cloud strategy. This development will help IBM to improve the price multiples of its cloud division.

Why will the IBM cloud division revenue show an improvement? The adoption of the cloud-based network is gaining an increased acceptance. According to Cisco Global Cloud Index, the global cloud IP traffic will increase six-fold over the next 5 years. The open cloud and the open virtualization sector is included in this trend. As a global leader in the open cloud and the open virtualization market, IBM will benefit from the development with its initiative. This will increase the cloud division revenues of the company.


IBM is well-positioned to make a gain in its cloud revenues. The company's strategic cloud assets have enabled it to gain a head start in the sector. In the first quarter, its cloud division revenues went up more than 70% on a year-on-year basis. Additionally, the company's software division revenues rose by 1% compared to the first quarter in the year prior.

In the fourth quarter, the IBM cloud division revenue went up 80% compared to the fourth quarter of the year prior. The company's software division revenue was $7.9 billion, an increase of 3% (up 4% adjusting for currency).

IBM and The Open Cloud Strategies

IBM has unveiled many strategies to extend its dominance in the open cloud and the open virtualization sector in the recent past. In July, the company will open its first North American power system Linux centers to make it simple for a developer to deploy an application in the open cloud sector. IBM opened its power system Linux center in Beijing in June for the use of its clients and its business partners. IBM plans to build more centers in both the growing and the established markets in the next few months.

IBM intends to make the Kernel-based Virtual Machine technology available across its power systems portfolio of server products. The development will enable the enterprise customers to have a greater choice when they utilize Linux-based systems to drive their new workloads in the cloud computing network. The initiative will also be useful in the big data and the mobile computing field.

IBM is focusing on the open cloud and the open virtualization sector to meet its 2013 revenue expectation of an earnings per share of at least $15.53. Fortunately, organizations increasingly demand for an optimized and a pre-integrated open cloud applications running on a Linux.

Looking at IBM's revenues, we see that the cloud division made an impressive gain on a year-on-year basis. It is clear the revenues of IBM have been improved by the division. So it can be said that the company is making progress in the cloud and the virtualization field.

With a price to earnings of 14.05, IBM is trading reasonably, especially given that it has a gross margin of 45.62%. The new open cloud and the open virtualization strategies will increase the company's cloud division revenues, improve the revenues of the software division, and enable IBM to meet its 2013 revenue targets.


With a price to sales of 2.17, compared with 1.85 for Accenture (NYSE:ACN), 0.41 for Hewlett-Packard (NYSE:HPQ), and 3.78 for Microsoft (NASDAQ:MSFT), and an EPS of 14.50, compared with 4.29 for Accenture, -6.85 for Hewlett Packard, and 1.94 for Microsoft, IBM is no pushover. Hewlett-Packard, Accenture, and Microsoft are rivals because they have the competing cloud products. However, IBM's steps in the open cloud and the open virtualization field will give it an advantage over its rivals.


There are a few risks in buying an IBM share. The company's revenue, EBITDA, and EPS growth rates have slowed down in the past few quarters. Also, IBM reported lackluster first quarter earnings results. But based on the quality of its open cloud strategies and the prospects in the global cloud traffic, we can say the support for the Kernel-based Virtual Machine technology will ultimately increase IBM's cloud division revenues. Looking at the company's price multiples, we can say it is good to hold the stock for the long term.

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.

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