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IBM (NYSE: IBM) is not your father's computer company anymore. Big Blue has been known in recent decades as a major provider of computer hardware, such as mainframes, servers, PCs, and disk drives.
The company is still doing well in mainframes, but hardware no longer defines it. Today, IBM is a leader in offering businesses cloud, mobile, and big data solutions. Through a long transition of shedding legacy businesses and acquiring new businesses in cutting-edge technologies, IBM saw its revenue decline 24% over the last decade, which caused the stock price to go nowhere.
However, 2018 is proving to be a turning point for IBM. It's on pace to have its first year of growth in seven years, and this could be just the beginning of better things to come. Let's take a look at where IBM is today and where investors can expect it to be in 10 years.
IBM Cloud facility in Dallas. Image source: IBM.
Adaptable IBM
Historically, IBM has been successful at adapting to changes in technology to stay relevant. For example, after the PC market became saturated after the boom of the 1990s, management made more than 100 acquisitions between 2000 and 2008 to position the company for growth in software and business services. The strategy worked, as it kept revenue growing and earnings roughly doubled during that period.
But around 2010, IBM found itself needing to adapt to the new era of mobile computing. The growth of social media and mobile devices was causing a greater demand for data analytics and security services. There was also a thing called the cloud that was becoming very important for organizations to tap into. If IBM wanted to stay relevant, it had to reinvent itself once again.
Under CEO Ginni Rometty, IBM has continued to divest unprofitable legacy businesses while doubling down on what management calls strategic imperatives. This includes IBM's enterprise solutions for data analytics, mobile solutions, security, and the cloud. These are areas that management expects to generate better growth and margins over the long term.
It's been a slow, painful transition for shareholders, but these investments are starting to bear fruit. After six straight years of declining revenue, IBM reported positive revenue growth of 4% in the fourth quarter of 2017 driven by double-digit growth from its strategic imperatives. That momentum has continued into 2018, which means IBM may finally be turning the corner.
Revenue from strategic imperatives grew 13% (excluding currency changes) in the second quarter and now make up 48% of IBM's trailing-12-month revenue. Over the long term, management has guided for low single-digit revenue growth and high single-digit growth in earnings per share.