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International Business Machines Corp. (NYSE:IBM) is in the midst of a secular revolution. The company headquartered in Armonk, New York, which is commonly called IBM, had a change in its chief executive officer in the middle of the pandemic lockdowns in April 2020, and the change in leadership seems to have paid off.

The technology giant, known for its dividend yield rather than capital appreciation, delivered 15.5% in 2023, outperforming the Dow Jones Index by almost two percentage points. Add in its juicy 4.1% annualized dividend yield, which brings total gains in 2023 to 19.6%, and there are compelling reasons to invest in the company.

Through my research, I illustrate how business fundamentals, cash flows and margins have started to look much better.

2023 was a year that most economists and market strategists got wrong. According to Bloomberg, while some economists baked in too much pessimism in the economy, market strategists issued calls for 2023 to be bleak. As the economic slowdown narratives faded with blowout U.S. gross domestic product estimates consistently surprising on the upside, according to Fortune, markets eventually became optimistic and the S&P 500 index notched a 24.7% gain in 2023. The Dow Jones Index underperformed at 13%, but IBM recorded almost 20% gains this year, taking into account its 15.5% stock performance and the 4.1% annualized yield.

While still impressive, many would view IBM as having underperformed the S&P 500 Index last year. However, when looking at larger historical performances and accounting for the severe volatility all investors were subject to in 2022, IBM has actually been outperforming the benchmark index. Its incredible performance is illustrated in the chart below.

IBM Is in the Midst of a Cloud Renaissance, Unlocking Secular Growth

This feat is something that would not have been deemed possible given how severely IBM underperformed between 2012 and 2020.

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While IBM is a popular pick among investors, especially value-focused investors hunting for yield, I will not go too deep into the history of the company. But I will point out that it had trouble retaining its client base, especially in the last decade, as it missed out on the cloud computing era of software development and distribution. With the rise of cloud computing, IBM severely lost market share to cloud hyperscalers such as Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT) and Alphabet's (NASDAQ:GOOG) Google.

Realizing it missed out on the opportunity, IBM acquired Red Hat, the maker of open-source cloud software products meant for enterprises to build software applications in the cloud, in 2019. This acquisition became pivotal to the technology giant fully pivoting into its cloud business. Later, IBM's new CEO, Arvind Krishna, offered a glimpse of his vision in an open letter in late 2021, where he outlined the key strategies for his vision to take IBM forward. At the center of his vision was to revamp IBM's entire product portfolio around the hybrid cloud and artificial intelligence.

Today, IBM calls itself a hybrid cloud company that helps enterprises build and scale AI, automation and hybrid-cloud-based solutions. As per its latest earnings report, the company makes most of its revenue from its Software and Consulting business verticals. While Software accounts for around 42% of sales, Consulting rakes in about 30% of the company's revenue. Since Software is the highest-margin business segment within IBM, I usually look for upward trends in this segment. Moreover, with Red Hat, Automation and AI part of the Hybrid Cloud subsegment, I want to see continued growth in the Software segment.

The most interesting part about IBM's reversal in business fortunes is that strength has started to return to its core Software segment. The Software segment is not only important to its overall growth narrative, but it also allows the company to leverage its position in the cloud computing space, which is still largely controlled by cloud hyperscalers. Within the Software segment, IBM's Hybrid Cloud business is critical. As can be seen in the chart below, this segment has started delivering consistent accretive growth to IBM's top and bottom lines.

IBM Is in the Midst of a Cloud Renaissance, Unlocking Secular Growth

In the third quarter of 2023, Red Hat and Automation led the year-over-year growth in Hybrid Cloud's 8% growth, with Red Hat up 9% and the Automation segment up 14%. For a company that was expected to grow in the low single digits for a good part of the last two decades, near double-digit growth is quite a welcome change. Typically, its software business is 80% subscription-based, while the remaining 20% is consumption-based. IBM's chief financial officer, James J. Kavanaugh, recently discussed the strength of its Subscriptions software business:

"If I extract out that 20% portfolio of consumption-based services and just look at the core subscription-based businesses of Red Hat, OpenShift and Ansible, we grew 19% overall. 110%-plus NRR on that renewal rate of that business. And within that 19%, OpenShift and Ansible were north of 40%. So, putting all that together, Software is at the high end of our segment model; we're only building in high single digits growth."

Finally, growth in the software segment is critical for IBM because this is a high-margin business, helping IBM book approximately 80% of revenue from this segment as gross profits. In a later section, I will unpack why this is important from a valuation standpoint.

I previously mentioned IBM's Consulting business has started to scale its contributions to the top line in a very meaningful way. What is more interesting to me is that as I looked back over the past two years of available quarterly filings and compared IBM's Consulting business with its closest rival in the space, Accenture (NYSE:ACN), I noticed that IBM's Consulting business has been delivering steady and respectable contributions to its top line. Even better, the company appears to be gaining ground in market share versus Accenture, as can be seen in the chart below.

IBM Is in the Midst of a Cloud Renaissance, Unlocking Secular Growth

A peek under the hood reveals a clearer picture as to why IBM has been able to deliver such consistent gains even as enterprises around the world have been cutting their budgets for consulting projects. At the core of the Consulting business is the Application Operations and Management Consulting segment, which is directly tied to IBM's aspirations to scale capabilities for its clients in the hybrid cloud. As can be seen, Application Operations along with business transformation have formed the bedrock of IBM's consistency on a year-over-year basis in its consulting business.

IBM Is in the Midst of a Cloud Renaissance, Unlocking Secular Growth

On the third-quarter earnings call with analysts, the CFO alluded to the strength in IBM's Consulting Business by adding that most of the growth was because it opened IBM's technology to strategic partnerships, particularly with the cloud hyperscalers. I believe this may have been one of the key reasons why IBM continued to reap benefits from greater cloud ecosystem velocity due to the partnerships. The continued growth in IBM's Consulting business gives me further hope that IBM will be able to achieve its target of 6% to 8% growth this year.

Per its most recent quarterly earnings, IBM's revenue was $14.8 billion, up 4.5% year over year. As I had talked about earlier in the post, the growth in earnings was driven by its Software segment and its Consulting business segment, which grew 7.8% and 5.6% year over year. While Software contributes 42% to IBM's top line, Consulting adds another 33%.

I mentioned earlier that the performance of IBM's Software business is crucial to the overall growth of the company; not just because it focuses on the hybrid cloud, but also because this is a high-margin business segment with 79.5% of its software business revenue being recognized as gross profit. Software's gross margins saw a nice bump up by 0.5% on a year-over-year basis. In addition, IBM's Consulting business saw a meaningful increase in its gross margins by 1.4% to 27.4%, thus lifting its overall gross margins by 1.7% to 54.4%. The incremental gains in gross margins also helped increase the non-GAAP operating margin by 1.7% to 15.6%.

In terms of free cash flow, its free cash grew by $1 billion to $5.1 billion, aided by strong growth in its operating cash flow, up $3 billion to $9.5 billion.

IBM projects its fiscal 2023 revenue will grow between 6% and 8%, while its non-GAAP earnings per sharewill decline by 5%. In fiscal 2024, consensus estimates project IBM to grow its revenue by 2.9%, with earnings per share rising by 4.4%. Assuming a 4.4% growth in earnings, this would mean IBM is trading at 17.8 times its forward earnings. Given the market estimates the S&P500 to trade at around 20 times its forward earnings, as per FactSet, this would give IBM at least 12% upside.

A major risk to IBM's positive outlook would be if enterprise spend were to suddenly fall, causing many enterprise clients to renegotiate their deals and push out their budget plans into subsequent periods. I use the word "suddenly because, so far,enterprise IT spend is expected to grow 8% into 2024, per Gartner. This is a strong projection, and these forecasts actually bode well for the revenue outlook of IBM into 2024. However, due to unforeseen circumstances, if there is a recession or even a soft landing, as Bank of America predicts, IBM's management may be forced to re-evaluate their forecasts lower for 2024.

A strong dollar could be another factor that could hurt the optimistic outlook for IBM. A majority of the company's consulting and software revenue comes from outside the U.S. If the dollar were to get stronger, it would dent the outlook for IBM to continue its growth into 2024. For example, one of the reasons that could push the dollar higher could be a reorientation by the Federal Reserve toward pushing interest rates higher.

Despite these risks, I still believe IBM would provide even greater opportunities to initiate or add to positions were we to see any downturn in the stock.

With the turnaround at IBM well underway, I believe this company has some great tailwinds that position the stock for upside. The accretive strength of its consulting and software businesses, with a renewed focus on hybrid cloud and AI technologies, has provided some opportunities for meaningful upside.

This article first appeared on GuruFocus.

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IBM Is in the Midst of a Cloud Renaissance, Unlocking Secular Growth - Yahoo Finance

The Brainy Insights

The global infrastructure as a service (IaaS) market size is anticipated to grow from USD 80 billion to USD 806.85 billion in 10 years. The market will experience rapid growth due to integrating artificial intelligence with IaaS during the forecast period.

Newark, Jan. 08, 2024 (GLOBE NEWSWIRE) -- The Brainy Insights estimates that the USD 80 billion in 2022 globalinfrastructure as a service (IaaS) market will reach USD 806.85 billion in 2032. Infrastructure as a service (IaaS) refers to outside parties providing cloud services to companies. If they use AIaaS, customers or enterprises can eliminate the requirement to run an on-site data centre. A cloud computing service called Infrastructure as a Service (IaaS) gives users access to networking, storage, and processing power when and when needed. It provides enterprises with several advantages. IaaS is highly scalable and adaptable, requiring no significant infrastructure improvements or large upfront expenditures. IaaS makes cloud computing services more accessible to small and medium-sized enterprises due to its low cost. Operations are automated, increasing efficiency and production. Other advantages of IaaS include location independence, data security, and remote accessibility. IaaS provides development, testing, recovery, backup, and storage.

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Key Insight of the Global Infrastructure as a Service (IaaS) Market

North America will dominate the market during the forecast period.

The region is home to the headquarters of major IaaS providers, which propels innovation in the industry. Due to the region's established IT and telecom sector and the readily available resources, new technology is adopted faster in the region.

In 2022, the hybrid segment dominated the market with the largest market share of 42% and market revenue of 33.60 billion.

The deployment type segment is divided into public, private and hybrid. In 2022, the hybrid segment dominated the market with the largest market share of 42% and market revenue of 33.60 billion.

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In 2022, the computing segment dominated the market with the largest market share of 37% and market revenue of 29.60 billion.

The service segment is divided into computing, storage, networking and others. In 2022, the computing segment dominated the market with the largest market share of 37% and market revenue of 29.60 billion.

In 2022, the IT and telecom segment dominated the market with the largest market share of 27% and market revenue of 21.60 billion.

The industry segment is divided into BFSI, healthcare, manufacturing, retail and e-commerce, education, IT and telecom and others. In 2022, the IT and telecom segment dominated the market with the largest market share of 27% and market revenue of 21.60 billion.

Advancement in market

The market-leading cloud services platform from HPE, the HPE GreenLake edge-to-cloud platform, was chosen by Fastweb, one of the top telecom operators in Italy, to modernize its Fastcloud Business Unit and boost agility by accelerating the rollout of new services. The new platform improves operations, security, and governance with better utilization and cost visibility. Three million users use Fastweb's mobile network, while 3.1 million use its fixed network. Its commercial unit, Fastcloud, offers government agencies and businesses cloud solutions, including software as a service (SaaS) and infrastructure as a service (IaaS).

Market Dynamics

Driver: The increasing demand for business process optimization.

Due to the growing competition, businesses are being forced to examine their operations and make changes. Automation and digitization across industries have allowed maximisers to completely change their operations by digitizating monotonous jobs and repetitive processes to maximize resources and boost revenue. Given the modern digital environment in which producers and consumers live, IaaS services have played a critical role in bringing about this shift. Flexibility, scalability, cost-effectiveness, rapid upgrades, downtime, security, and dependability have all been provided by IaaS. Therefore, IaaS adoption will rise and contribute to its global expansion due to the increasing requirement to optimise corporate processes to survive market competition and enhance customer happiness and retention.

Restraints: Threats and hazards to cyber-security have increased.

Given that IaaS provides networking and computing services, Threats and cyber-security hazards have increased. Because thousands of people use the internet to access computing, networking, and storage services provided by IaaS, there is an increased danger of cyberattacks. Businesses risk collapsing due to data breaches, thefts, and other hacking incidents. Other consequences include lost time, money, and client confidence. There may occasionally be some danger involved in using third-party IaaS services. As a result, worries about data privacy and other security issues will impede the market's expansion.

Opportunities: The combination of large data and AI.

The development of AI, IoT, and big data technologies has given market participants new options. When these technologies are combined with IaaS, automating tasks, increasing productivity, decreasing redundancy, saving money, and gaining new insights previously unattainable with outdated computing algorithms will be feasible. These would create new business channels and chances for enterprises, propelling market expansion over the projection time.

Challenges: the regulations governing the use of IaaS.

The IaaS providers are responsible for the data they store or share. A set of rules and regulations by relevant authorities governs them. These regulations might be different for each country. However, the virtual nature of IaaS makes it difficult for the provider to standardize their checks and balances to incorporate each country's guidelines. Therefore, the regulations governing IaaS will challenge the market's growth.

Get additional highlights on the growth strategies adopted by vendors and their product offerings: https://www.thebrainyinsights.com/enquiry/request-customization/13916

Some of the major players operating in the global infrastructure as a service (IaaS) market are:

Alibaba Group Holding Limited Amazon Web Services, Inc. Dell EMC Google LLC Hewlett Packard Enterprise Development LP International Business Machines Corporation Microsoft Corporation Oracle Corporation Rackspace Hosting, Inc. Redcentric Plc

Key Segments covered in the market:

By Deployment Type

Public Private Hybrid

By Service

Computing Networking Storage Others

By Industry

BFSI Healthcare Manufacturing Retail and E-Commerce Education IT and Telecom Others

By Region

North America (U.S., Canada, Mexico) Europe (Germany, France, the UK, Italy, Spain, Rest of Europe) Asia-Pacific (China, Japan, India, Rest of APAC) South America (Brazil and the Rest of South America) The Middle East and Africa (UAE, South Africa, Rest of MEA)

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About the report:

The market is analysed based on value (USD Billion). All the segments have been analyzed on a worldwide, regional, and country basis. The study includes the analysis of more than 30 countries for each part. The report analyses driving factors, opportunities, restraints, and challenges to gain critical market insight. The study includes Porter's five forces model, attractiveness analysis, Product analysis, supply and demand analysis, competitor position grid analysis, distribution, and marketing channels analysis.

About The Brainy Insights:

The Brainy Insights is a market research company, aimed at providing actionable insights through data analytics to companies to improve their business acumen. We have a robust forecasting and estimation model to meet the clients' objectives of high-quality output within a short span of time. We provide both customized (clients' specific) and syndicate reports. Our repository of syndicate reports is diverse across all the categories and sub-categories across domains. Our customized solutions are tailored to meet the clients' requirement whether they are looking to expand or planning to launch a new product in the global market.

Contact Us

Avinash DHead of Business DevelopmentPhone: +1-315-215-1633Email: sales@thebrainyinsights.comWeb: http://www.thebrainyinsights.com

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Infrastructure as a Service (IaaS) Market to Grow at CAGR of 26% through 2032 - Growing Need to Optimize Business ... - Yahoo Finance

Bloomberg expects the generative artificial intelligence (AI) market to compound at 42% annually to reach $1.3 trillion by 2032. Investors might assume Nvidia is best positioned to benefit given its leadership in machine learning processors. But some Wall Street analysts see Microsoft (MSFT 1.86%) as the bigger winner because it can monetize AI across a broader range of infrastructure and software products.

Indeed, CFRA analyst Angelo Zino recently wrote that Microsoft is "best positioned to monetize generative AI given its ample offerings and pricing power." He listed cloud services, software copilots, and OpenAI large language models (LLMs) as key AI revenue streams in the future.

Likewise, Morgan Stanley analyst Keith Weiss believes Microsoft is "best positioned in software to monetize GenAI across infrastructure and apps." And Oppenheimer analyst Timothy Horan recently noted that "Microsoft stands alone by having the best AI infrastructure and LLMs."

Here's what investors should know.

Microsoft has a strong presence in several enterprise software categories. Most notably, Microsoft Teams is the leading unified communications platform, Microsoft Dynamics is the leading enterprise resource planning platform, and Microsoft 365 is the leading office productivity suite.

That list is by no means exhaustive. For instance, Microsoft Power BI holds the top spot in business intelligence software, and industry analysts have recognized the company as a leader in several cybersecurity software verticals, including corporate endpoint security. But the upshot is that Microsoft has a massive customer base.

In fact, the company accounts for more than 16% of all software-as-a-service (SaaS) revenue, nearly twice as much as its closest competitor Salesforce. That supports the idea of Microsoft being the software company best positioned to monetize AI, and the company is leaning into that opportunity with new copilot products.

Microsoft 365 Copilot is a generative AI assistant that automates workflows across its office productivity applications. It can draft and rewrite text in Word, create content and presentations in PowerPoint, organize and analyze data in Excel, and summarize conversations in Teams. Microsoft 365 Copilot became generally available in November.

Microsoft has taken a similar tack with its other software products. For instance, Dynamics 365 Copilot automates workflows across sales, marketing, customer service, and supply chain management. Likewise, Security Copilot automates workflows across various cybersecurity software products.

Those generative AI assistants should ultimately help Microsoft better monetize its market-leading enterprise software.

Microsoft is also well positioned to monetize AI with its cloud computing platform. Azure captured 23% market share in cloud infrastructure and platform services in the third quarter, second only to Amazon Web Services. But Azure has steadily gained share over the past five years because of strength in AI infrastructure and developer services.

In fact, CEO Satya Nadella says Azure has the "best AI infrastructure for both training and inference." He also believes Microsoft's exclusive partnership with OpenAI has positioned the company as the market leader in cloud-based AI services.

Per that partnership, Microsoft is the exclusive cloud provider for all OpenAI workloads, meaning the company earns revenue from ChatGPT because the application runs on Azure infrastructure. Microsoft is also the only cloud provider that offers access to OpenAI machine learning models. Businesses can use those models, including the GPT models that power ChatGPT, to build custom generative AI applications.

That could certainly draw customers to Azure in the future, possibly helping Microsoft gain more ground on Amazon. In any case, JPMorgan Chase analysts have opined that "Microsoft's investment into OpenAI, which started years ago, could potentially prove to be some of the best money ever spent."

To summarize the key points, Microsoft has a strong presence in enterprise software and cloud computing, and the company is levering AI to improve its products and create new revenue streams across both business segments.

With that in mind, enterprise SaaS spending is forecasted to increase at 13.7% annually through 2030, while cloud spending is projected to increase at 14.1% annually during the same period. That gives Microsoft a good shot at low-double-digit revenue growth through the end of the decade, which should translate into similar earnings growth.

Indeed, the Wall Street consensus calls for annual earnings-per-share growth of 14.6% over the next three to five years. That forecast makes its current valuation of 35.6 times earnings seems tolerable, despite being a premium to the three-year average of 32.2 times earnings. Patient investors should consider buying a small position in this stock today.

As a caveat, while some analysts have intimated that Microsoft is the best AI stock, it would be foolish for investors to put all their chips on one company. Building a basket of AI stocks is a more prudent strategy. I believe Microsoft has a place in such a basket, but given its market capitalization of $2.7 trillion, other AI stocks (smaller companies) probably have more upside.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fools board of directors. Trevor Jennewine has positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Amazon, JPMorgan Chase, Microsoft, Nvidia, and Salesforce. The Motley Fool has a disclosure policy.

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The Best Artificial Intelligence (AI) Growth Stock to Buy, According to Several Wall Street Analysts -- No, It's Not Nvidia - The Motley Fool