Ibm's It Investment Strategies: Secrets To Their Success

International Business Machines Corporation (IBM) is a software, hardware, and consulting company that has been in operation for over 110 years. IBM has transformed itself multiple times over the past century and has recently shifted its focus towards hybrid cloud computing and artificial intelligence (AI). IBM's revenue in 2023 was $61.9 billion, with three-quarters coming from software and consulting services. The company has a market cap of $205.99 billion and a stock price of $222.78 as of January 2025. IBM has been criticised for its slow adaptation to market trends and struggles to keep up with more agile competitors like Google and Microsoft. However, with its strategic transformation and focus on hybrid cloud and AI, IBM aims to achieve its long-term financial goals.

IBM's revenue sources

IBM has been shifting its focus towards hybrid cloud computing and AI, positioning itself as a leader in these markets. The company's $34 billion acquisition of Red Hat in 2019 was a significant move in this direction, and its revenue is expected to rise as a result. However, IBM has also faced challenges in keeping up with more agile competitors in the tech industry, such as Google and Microsoft, and has experienced steady revenue loss and earnings contraction over the past decade. Despite these challenges, IBM remains a well-known technology company with a long history of operations.

IBM's acquisitions

IBM has undergone a large number of mergers and acquisitions over its corporate history of more than a century. IBM's most notable acquisitions in recent years include:

• Red Hat, a software company, for $34 billion in 2019.
• Prescinto, a leading provider of asset performance management software-as-a-service for renewables, acquired in October 2024.
• HashiCorp Inc., a leading multi-cloud infrastructure automation company, for $6.4 billion.
• Accelalpha, a global Oracle services provider.
• SiXworks Limited, a UK-based consultancy serving the UK defence sector.
• SKYARCH NETWORKS INC., a Japan-based professional services company specialising in Amazon Web Services (AWS).
• Kubecost, to broaden hybrid cloud cost management capabilities.
• Pliant, to enhance network IT automation capabilities.
• StreamSets and webMethods Platforms from Software AG.
• Equine Global, to expand consulting capabilities in Indonesia.
• Manta Software Inc., to complement data and AI governance capabilities.
• Apptio Inc., providing actionable financial and operational insights across enterprise IT.
• Agyla SAS, to expand hybrid cloud consulting capability in France.
• Randori, to tackle growing attack surface risks.
• Neudesic, a leading Microsoft Azure Consultancy.
• Sentaca, bringing over a decade of cloud consulting experience.
• Envizi, to help organisations accelerate sustainability initiatives and achieve environmental goals.
• SXiQ, a hybrid cloud consulting business in Australia.

IBM's strategy is focused on leading in the era of hybrid cloud and AI, with three-quarters of its revenue generated from software and consulting, and half from recurring sources.

IBM's revenue loss

IBM's revenue has been on a general downward trend over the past decade, having previously exceeded the 100 billion U.S. dollar mark. In 2019, IBM spent $34 billion on acquiring software company Red Hat, and in 2021, it spun off its managed infrastructure services business. These moves have impacted the company's revenue profile.

In 2020, IBM's revenue fell 2.8% year-over-year to $17.56 billion, marking the third consecutive quarter of declining revenue. The company's stock has been in a major downtrend for more than seven years, and Wall Street is sceptical about its long-term outlook.

Despite the revenue decline, IBM remains one of the most valuable technology brands globally. The company has shifted its focus to software and consulting services, with three-quarters of its revenue now coming from these segments. In 2023, IBM generated around $62 billion in revenue, a 2.2% increase from 2022. The company's revenue for the quarter ending September 30, 2024, was $14.968 billion, a 1.46% increase year-over-year.

IBM's competitive position

IBM's revenue profile has changed due to this rejiggering, with three-quarters of its revenue now coming from software and consulting services. The company's hybrid cloud platform, built on the foundation of its $34 billion acquisition of Red Hat in 2019, ties together its offerings in cybersecurity, automation, data analytics, AI, and transaction processing. The consulting segment, which accounts for a significant portion of its revenue, focuses on helping clients modernize their applications and digitally transform their operations, often utilising other IBM products and strategic partnerships.

However, IBM has faced challenges in recent years, struggling to keep up with more agile competitors like Google and Microsoft in adapting to market trends. The company has experienced steady revenue loss and earnings contraction over the past decade, despite active mergers and acquisitions (M&A) activity. There have also been criticisms of execution issues, such as delays in integrating acquisitions and delivering on growth promises, which have impacted investor confidence.

In terms of competitiveness, IBM has faced challenges in attracting top talent and partnership opportunities compared to its tech giant rivals. Additionally, its legacy business, anchored in hardware and on-premise enterprise software, is seen as less agile and adaptable to the cloud-based software landscape. According to Morgan Stanley's 3Q23 CIO Survey, US technology decision-makers expect their spending on IBM's Red Hat cloud services to decrease by about 9% over the next three years, indicating a potential decline in demand for one of its core offerings.

Despite these challenges, IBM has positioned itself as a leader in the enterprise hybrid cloud and AI markets. The company's strategic transformation towards these growth areas has been recognised, and it has achieved a substantial shift in its revenue sources. However, it remains to be seen if this new focus will be enough to compete with the industry's super-successful tech players.

IBM's future outlook

IBM's current strategy is to lead in the era of hybrid cloud and AI, and it has made significant moves in this direction over the past decade. In 2019, IBM acquired software company Red Hat for $34 billion, and in 2021, it spun off its managed infrastructure services business. These moves have successfully returned IBM to growth, with revenue expected to rise in 2024 and free cash flow expected to improve.

However, IBM has faced challenges in keeping up with more agile and innovative competitors like Google and Microsoft. The company has experienced steady revenue loss and earnings contraction over the past decade, despite active M&A activity. IBM's net debt increased from $28.7 billion in 2013 to $47.5 billion as of Q3 2023, and it has struggled with delays and inefficiencies in integrating acquisitions.

Looking ahead, IBM is seeing negative momentum on consensus EPS expectations, with earnings estimates trending downward for over three years. The company's stock has underperformed the broad equities market, with shares up less than 15% compared to a gain of approximately 23% for the S&P 500. Despite these challenges, IBM's ongoing product transition toward cloud and AI may present opportunities for R&D upside and renewed customer interest.

Frequently asked questions