Data Analytics, Cloud Investments Paying Off for Big Blue

By
  • Brooke Sutherland
Published
  • February 19 2016, 6:30am EST

(Bloomberg) -- Change is afoot at IBM, and investors are starting to believe in it.

The aging technology giant has been trying to counter dwindling sales at its once-core hardware and software businesses by investing in cloud-computing and data-management technology. IBM wasn't getting much credit for its efforts until Thursday, when the stock -- trading near its lowest level since 2009 -- shot up by as much as 6.3 percent.

First, IBM announced it was buyingTruven Health Analytics for $2.6 billion. It's one of the biggest deals yet to build up the Watson supercomputer, which turns reams of data into constructive analysis on everything from retail sales to diabetes care. Then, Morgan Stanley upgraded the stock, saying IBM's transformation from old-school hardware to faster-growth cloud and data offerings is happening faster than expected.

IBM deserves a premium over peers that aren't transitioning as quickly, according to analyst Katy Huberty, who said IBM's parts could be worth as much as $169 a share as new cloud and data initiatives make up a bigger portion of its revenue. That compares with about $130 now. Her price target for the next year is $140.

All of this means IBM is doing what it's supposed to be doing. The upgrade says it's not ``headed for the death spin of technology companies, '' says Kimberly Forrest of IBM investor Fort Pitt Capital Group. Instead, it's making efforts to invest in the faster-growing parts of its business. That should help revive revenue growth and make the total package of products it can offer to customers more attractive.

Other recent purchases include the about $1 billion purchase of Merge Healthcare, a maker of software that allows doctors to store and share medical images, and a deal for Blue Box, a managed private-cloud provider.

IBM still has a ways to go to turn itself around and prove itself to investors. Revenue is projected to decline for a fifth straight year and the stock is still down about 18 percent over the last 12 months. But investors are starting to buy in to the notion that it's headed in the right direction.

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