IBM Bets Big on $1T Hybrid Cloud Market With Business Spin-off

There have been major developments this year amid the coronavirus crisis in the technology sector, from NVIDIA acquiring ARM Holdings, Oracle and Walmart’s stake in TikTok, and Microsoft’s Bethesda acquisition to even the most recent rumored deal of AMD looking to acquire its rival Xilinx for $30 billion.

News of merger, acquisition and spin-off keep ticking. Coronavirus crisis has compelled companies globally to rethink business strategies and alter their spending patterns. International Business Machines Corporation IBM isn’t immune to the trend.

The company recently announced the spin-off of its legacy Managed Infrastructure Services business in a bid to accelerate its hybrid cloud growth strategy, with a focus on enabling clients with accelerated digital transformation.

The company’s Managed Infrastructure Services, a unit of its Global Technology Services division, will be spun off into a new public company or NewCo (set to be named later). The deal is anticipated to “be achieved as a tax-free spin-off to IBM shareholders,” with closure set at the end of 2021.

IBM’s chief executive officer Arvind Krishna’s words explain the big bet and his vision in a nutshell. He said, “IBM is laser-focused on the $1 trillion hybrid cloud opportunity.”

The aim is to fortify its presence in two different territories by creating two entities to realize business goals and best outcomes. IBM’s open hybrid cloud platform and AI expertise are poised to get a boost with the new deal. Meanwhile, NewCo is set to gain new capabilities and greater agility to “design, run and modernize the infrastructure of the world’s most important organizations.”

Upbeat Preliminary Q3 Results

IBM expects to report revenues of $17.6 billion and non-GAAP earnings of $2.58 per share.

Meanwhile, the Zacks Consensus Estimate for third-quarter revenues and earnings is currently pegged at $17.51 billion and $2.55 per share. Notably, the Zacks Consensus Estimate for earnings has remained unchanged for the past 60 days.

Hybrid Cloud Stakes Up: Key Takeaways

IBM, currently carrying a Zacks Rank #3 (Hold), intends to provide enterprises with a market-leading hybrid cloud platform, enabling them to shift their business applications seamlessly to the cloud.

IBM’s unique full-stack capabilities, secure open hybrid cloud platform architecture based on RedHat OpenShift, strength in AI, data analytics, automation, and security solutions remain key catalysts.

The company has gradually evolved as a provider of cloud and data platforms. Two years back, it entered a definitive agreement to acquire Red Hat, Inc. for approximately $34 billion in cash.

The Red Hat acquisition, in particular, is enabling IBM in enhancing containerized software capabilities and strengthening competitive position in the hybrid cloud market. Improving position in the hosted cloud, security and analytics domains bodes well.

With the Red Hat buyout, IBM offers Linux operating system — Red Hat Enterprise Linux — and hybrid cloud platform — Red Hat OpenShift — which aids enterprises with digital transformation.

In fact, the company is witnessing solid uptake of cloud-based solutions and digital transformation offerings. Markedly, in the second quarter, revenues from Red Hat totaled $1.09 billion, reflecting an increase of 17% (up 18% at cc) on a normalized basis.

Currently, more than 2,400 clients are using Red Hat and IBM’s hybrid cloud platform, and around 600 IBM Services clients are leveraging the Red Hat technology. Moreover, OpenShift and Ansible supported advancements in application and technology developments.

We believe that IBM’s attempt to bolster its hybrid cloud business with the new spin-off strategy is likely to pave the way for the company’s growth prospects.

With an unabated focus on its open hybrid cloud and AI solutions, “IBM will move from a company with more than half of its revenues in services to one with a majority in high-value cloud software and solutions. IBM will also have more than 50% of its portfolio in recurring revenues.”

We anticipate the latest development to boost IBM’s hybrid cloud business and help it in reviving its fortunes and pave the way for a robust and secure hybrid cloud infrastructure.

Cloud War Bells Ringing

The new deal is anticipated to pep up the cloud war since IBM’s Hybrid Cloud is poised well to gain from doubled down focus and strength in the sturdy business model coupled with synergies from Red Hat, and its robust capabilities in providing hybrid cloud technology solutions.

Per a report by Mordor Intelligence, the global hybrid cloud market is expected to hit $128.01 billion by 2025 from $45.7 billion in 2019, witnessing a CAGR of 18.73% between 2020 and 2025.

Immense growth opportunities in the hybrid cloud market are alluring enough to induce other cloud service providers to make advances into it.

Year-to-Date Price Performance


Microsoft MSFT is strengthening Azure capabilities with investments in technologies like Kubernetes and GitHub Actions to automate the process of checking code as well as deploy containerized applications, and web applications. This is expected to be a strong driver for Azure cloud adoption, going ahead.

Moreover, roll out of Azure Data Lake Storage (ADLS) Gen2 cloud storage solution is set to aid Microsoft strengthen presence in hybrid cloud market.

In fact, Microsoft Azure is gaining ground in the cloud computing market, and trails only Amazon’s AMZN cloud computing arm Amazon Web Services (AWS). Per a Canalys Report, for the second quarter of 2020, market share in the cloud infrastructure services space of Microsoft, currently carrying a Zacks Rank #3, increased to 20% from 18% in the prior-year quarter.

Nevertheless, AWS holds a dominant position in the cloud computing space, courtesy of a solid momentum across customers on the back of its portfolio strength. AWS market share remained unchanged at 31% for the second quarter of 2020 on a year-over-year basis.

Moreover, AWS offers strong discounts for long-term deals that help it in attracting customers. Markedly, AWS’s service, namely Outposts with VMware Cloud, enables customers to utilize the VMware control plane and APIs to run the hybrid environment.

Also, AWS has become an integral division of the company as it generates significantly higher margins compared with Amazon’s retail business. We believe that expanding the customer base will aid it to retain its dominance in the quarters ahead.

Likewise, Alphabet’s GOOGL Google Cloud Platform’s growing focus toward bolstering hybrid cloud capabilities is likely to provide tough competition in the space. Markedly, Alphabet’s acquisition of CloudSimple in November 2019 is a significant step toward bolstering Google Cloud’s presence in the hybrid cloud space.

Also, the roll-out of Anthos is noteworthy. The most important feature of Anthos is its ability to adapt various data center environments into a single managed service. This feature enables users to run their applications not only on Google Cloud servers but also across servers of other cloud service providers.

Apart from the launch of Anthos, the search giant teamed up with Hewlett Packard Enterprise HPE to strengthen the hybrid cloud solutions portfolio. Per the Canalys Report quoted above, for the second quarter of 2020, market share of Google Cloud increased to 6% in second-quarter 2020 from 5% in the prior-year quarter.

Alphabet currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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