IBM Signals The End Of Amazon’s Dominance
Okay, let’s get one thing straight.
Amazon AMZN is not an e-commerce stock. It’s a cloud stock.
For years, the e-commerce king has been making most of its money from storing other businesses’ data on the internet. Even on lockdown—when people splashed money online as never before—the cloud pulled in 67% of Amazon’s profits.
Amazon’s done so well because the cloud is a humongous industry growing by double digits every year. And until recently, it enjoyed nearly zero competition from big tech.
Here’s what the cloud market looked like in 2015:
But then big tech took notice.
Tech giants like Google GOOG and Microsoft MSFT began duking it out for a slice of this lucrative industry. Have you seen Microsoft lately? The once tech dinosaur doubled down on the cloud and its stock grew more than 4X in the past five years:
I’m telling you this because another tech dinosaur is rising up to stalk Amazon. You may have seen this stock flashing in the headlines lately. I’m talking about IBM IBM .
Last week, the company tipped off that it’s going all in on the cloud. And as I’ll show, it could be one of the best cloud trades of this decade.
IBM has turned a corner… again
IBM is an old-as-dirt company that has reinvented itself for centuries. That’s right, centuries.
In the ‘50-70s, IBM was king of commercial computers (i.e., mainframes)—heavy machines the size of walk-in closets that cost millions of dollars and helped big corps process data. IBM was so big that it was making 70% of mainframes worldwide.
Then, in the ‘80s, IBM jumped onto the personal computer bandwagon. In 1981, IBM launched its first desktop computer, the IBM Personal Computer (PC)—which quickly became the standard for computers. By 1984, it was outselling Apple 2X.
But competition quickly caught up and copy-catted IBM out of its lead. In the early 1990s, IBM nearly went bust.
IBM picked itself up and turned to businesses again. The company shifted its focus to services—which remains IBM’s biggest business today. And for the next couple of decades, it was holding up pretty well.
Now IBM has turned a corner again. In 2012, its sales (and the stock) began a slow and painful descent. So IBM has once again decided to hit the restart button.
Now IBM is going all in on the cloud
Last July, IBM struck one of the biggest deals in U.S. tech history. For $34 billion, it bought out software company Red Hat RHT . IBM is now hitching onto its technology and talent to catch up to Amazon and Microsoft in the cloud.
After that, IBM pulled a series of cloud partnerships with big corps. It joined forces with tech and telecom giants Verizon VZ , Adobe ADBE —as well as big banks such as CaixaBank and French bank conglomerate BNP Paribas.
Then this year, IBM started moving around the rest of its business to the cloud.
Last April, IBM handed the reins of IBM over to Arvind Krishna, an ex-head of IBM’s cloud division. And just last week, the company announced it would spin off its slowing services businesses next year.
In other words, the company is getting rid of everything that’s weighing down its cloud growth. Very soon IBM will be a pure cloud stock.
IBM may be like Microsoft was five years ago
Microsoft was in a similar position not so long ago.
In 2015, the tech giant’s legacy business slowed and its profits began sliding downhill. But then, Microsoft’s brought aboard its new CEO, Satya Nadella, who laser-focused the company on the cloud.
Today Microsoft is #2 in the cloud, nipping at Amazon’s heels. The cloud became one of Microsoft’s most profitable businesses. Meanwhile, Microsoft stock has shot up a staggering 338% since 2015.
IBM could be one the best Covid trades
Funny story. I was reading an MIT analysis of IBM’s business the other day. Here’s a short excerpt:
“IBM is making a comeback. Although many observers had counted the company out — ‘It’s a dinosaur, an implosion, a wreck,’ various commentators said — its revival was probable….”
It didn’t even dawn on me right away to check the date of publication. Turns out, I was reading an article from 1996.
Takeaway: this is not IBM’s first time being slapped with a dinosaur or zombie label. Yet every single time it has come back with a bang. Might as well call it a tech cockroach.
Now IBM is staging another comeback. It’s taking on one of the most lucrative tech industries. And it appears that IBM is primed to walk away with a good slice of it.
Last quarter, IBM’s cloud sales grew 30% compared to a year ago. Still, that’s just baby steps in contrast to Amazon and Microsoft—which is why IBM is trading much, much cheaper than the cloud giants.
But with so much upside, IBM could grow into one of the best cloud trades of this decade. And it doesn’t hurt that it pays a fat 5% dividend in the meantime. For those reasons, I’m keeping a close eye on IBM in this earnings season.
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