IBM Stock Prediction: How IBM Cloud Can Attract More Customers

motek 1The article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology – Senior Analyst at I Know First.

Summary:

  • Based on its First Quarter 2019 earnings report, IBM continues to suffer from declining revenue.
  • IBM’s cloud computing business is not growing fast enough to offset the decline in mainframe hardware/software.
  • Management should consider buying Corel Corporation so it can compete better against enterprise SaaS leaders Microsoft and Adobe.
  • Corel has software products which can compete against Adobe Creative Cloud and Office 365.
  • After buying Corel Corporation, IBM can rename and market CorelDraw, CorelCAD, and WordPerfect suites as SaaS-only products.

International Business Machines (IBM) is still handicapped by a negative revenue growth. A diligent review of IBM’s Q1 earnings report convinced me that its cloud computing business is not growing fast enough. The company’s overall quarterly revenue of $18.2 billion is down 4.7% year-over-year. Without radical changes to its business strategy, I fear that IBM’s flatlining revenue performance will persist for the next 10 more quarters.

The chart below easily explained why IBM’s P/E valuation ratio of 14.69x is much lower than that of Microsoft’s (MSFT), 28.27x.

Source: MacroTrends

My takeaway is that IBM’s management should revamp their current strategy. Without a radical or bold move, IBM’s dipping revenue trend can continue for another five years. IBM obviously cannot grow its mainframe/software maintenance business anymore. Its best growth driver is IBM Cloud. Trying new ways to attract more long-term customers to IBM Cloud is not easy due to fierce competition from Amazon (AMZN), Microsoft, and Google (GOOGL).

The Current Dilemma

IBM’s cloud computing hardware/software services is not growing fast enough to catch up with Microsoft. As more companies switch from their on-site mainframe computers to cloud-based platforms, IBM needs to find more customers for its public and hybrid cloud platforms.

Forget about IBM Watson, for the next 3 to 5 years, legacy business processes (not Artificial Intelligence) offer more growth potential. Unfortunately, IBM is losing market share in cloud infrastructure. The chart below illustrates that IBM is in danger of getting surpassed by Alibaba (BABA) in the global cloud infrastructure business.

It is painful to see IBM losing market share while its rivals are growing theirs. IBM’s future is less than perfect if it drops out as among the top five players in cloud infrastructure. My guesstimate is that Alibaba and Tencent will eventually kick out no.4 IBM in cloud infrastructure by 2021. This is sad because the cloud infrastructure industry grew 48% year-over-year in 2018. This industry’s revenue in Q4 2018 was $20 billion. Last year’s full-year revenue was $70 billion.

IBM Cloud’s declining market share in the fast-growing cloud infrastructure business should compel it to find other sources of growth.

My Recommendation

If IBM cannot properly grow as a cloud infrastructure service provider, I suggest it goes after Microsoft’s lucrative Office 365 and Adobe’s (ADBE) Creative Cloud. IBM’s topline growth can see positive CAGR for the next five years if it can attract 10 million paying subscribers of its own versions of Office 365 and Adobe’s Creative Cloud.

Microsoft and Adobe dominates the enterprise SaaS business because they offer productivity and content creation software products. IBM should challenge this duopoly by buying and renaming Corel software products as IBM Office 24/7 and IBM Creative 365. Corel has various software programs that can make IBM a real SaaS rival of Microsoft and Adobe. Corel even has CorelCAD – a cheaper but worthy alternative to Autodesk’s $200/month AutoCAD.

Source: Corel

IBM cannot obviously catch up with Amazon Web Services and Microsoft Azure. However, it is very plausible for IBM to disrupt the Software-as-a-Service duopoly of Microsoft and Adobe. IBM still has over $18 billion in cash reserves. It can easily buy Corel Corporation. Doing so can lead to IBM competing better in enterprise Software-as-a-Service. The public cloud applications/SaaS industry is estimated to generate $94.8 billion this year. It is bigger than the cloud infrastructure or datacenter business.

Source: Statista

There is big money to be made in offering $9.99 per month word processor/spreadsheets/presentation software programs. Corel has WordPerfect and its latest no. 19 iteration was released last year. I am writing this article on WordPerfect X9. I find a great alternative to Microsoft Office 365/Office 2016 Desktop version. IBM can replicate the success of WPS Office by reworking WordPerfect X9 to look like Microsoft Office 2016/2019. As of now, WordPerfect X9 is still using the old Microsoft Office 2003 UI/UX design.

Source: Motek Moyen

My guesstimate is that IBM has enough influence to attract 5 million paying subscribers of its $9.99/month office productivity suite. It can also attract another 5 million customers for its $19.99 photo/video/web content creation software suite.

Conclusion

IBM’s cloud computing revenue can benefit a lot from recruiting 10 million customers (paying an average of $19.99 per month) for subscription-only software products. They can add up to $1.8 billion in new quarterly revenue. I will go long on IBM if management is brave enough to challenge Microsoft Office and Adobe Creative Cloud.

I have little faith that IBM Watson’s cognitive AI power can be a major growth driver for IBM. My fearless forecast is that there is more money to be made from renting out office productivity and design/content creation software programs.

I Know First has a slightly bullish score for IBM’s 1-year market trend forecast. However, a score of +58.42 is not a buy signal for me. Going forward, IBM’s stock price will likely stagnate for the next 12 months. Avoid investing in IBM for this year. Let us wait if management can find new ways to reverse IBM’s persistent revenue decline.

Past I Know First Forecast Success With IBM

On March 3, 2019 The I Know First predictive algorithm gave a bullish prediction for Microsoft with the signal being for the 1-month time horizon at 1.75 and with predictability indicator of 0.41. Over one month, the stock rose by 3.18%.

This bullish forecast for IBM was sent to I Know First subscribers on March 3, 2019.

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