A decade ago, IBM embarked on a major course of reorganization and attempts to become a cloud computing provider by making large investments and transactions. This increased investment had a little positive effect on the company’s primary legacy IT services, business software, or hardware divisions, as everything continued to shrink in size.
IBM’s sales dropped to $73.6 billion in 2020. It earned $25.1 billion from the purchase of Red Hat, but was still unable to make up for its neglect of older product lines of business. So, the pandemic intensified the business slowdown by accelerating expenditure and delaying several big deals.
In an attempt to develop sustainable growth, IBM aims to separate out its controlled IT services unit and build up the rest of its hybrid cloud and AI.
At 10 times earnings, the IBM stock looks cheap. It has a return on equity of 44% and pays a dividend of 52%. However, over the past year, the stock’s 5% fall indicates that investors are skeptical about the current restructuring attempts of Big Blue plans succeeding. If investors were concerned about the pending splits at IBM, they should only hold on to their positions with Amazon because of the following:
1. One of the Industry’s Early Movers
AWS was established in the early days of the internet with the aim of providing internet-based cloud computing services. When Amazon launched its AWS cloud service, it provided services to major clients including Netflix, Verizon, and Capital One.
Canalys estimates that Amazon’s share of the global cloud computing market grew by less than one percentage point, and was therefore 32 percent in the fourth quarter. During the same time frame, Microsoft’s Azure increased their market share from 18% to 20%.
Alphabet’s Google and Alibaba, which is in third and fourth place respectively, both hold single-digit percentages of the global cloud computing market. IBM’s share, which can’t be broken out from the other networks, is recorded together as “vitality.”
2. Amazon Maintains Extreme Transparent Basis
When Amazon first published AWS’s profitability in 2015, it also broke up its market share of sales and operating income.
Expected sales reached $45.4 billion in 2020, increasing by more than expected 30%, and it beat estimates for an operating profit of $13.5 billion in the year 2020. Overall, Amazon reported for 12% of Amazon’s sales, but 59% of its overall profit. Amazon’s business model makes it unique in that it’s the only company that is transparent about how much money it makes from the cloud.
Microsoft says that Azure is experiencing year-over-over-year increases in sales and earnings, but is not ready to reveal the exact numbers. Google estimates that it has had huge sales, but uncertain how much it profited.
Alibaba Cloud is positive, according to Alibaba, but only on a modified EBITDA basis, which includes its heavy stock-based incentives and other contingent expenditures. It’s also profoundly unprofitable according to GAAP.
The “cloud and cognitive applications” section produces the majority of IBM’s cloud revenue, while “complete” cloud revenue includes cloud services from all of the company’s other divisions. IBM’s cloud and computational software sales increased just 2% to $23.4 billion in 2020, suggesting that the pandemic-related crosswinds that lifted Amazon, Microsoft, and Google’s cloud sales during the year were not felt by IBM. The unit’s gross margin increased from 77.1% to 77.5%, but IBM did not say whether it is profitable or not.
Amazon’s faith in AWS is expressed in the transparency of its reporting procedures. Its cloud rivals, such as IBM, aren’t ready to reveal their secrets just yet, implying that they’re all hemorrhaging money to catch up.
3. Amazon Is a Distributed System and AI Player
Arvind Krishna, IBM’s current CEO, wants the firm to extend its footprint in the “hybrid” cloud, which sits between multiple cloud providers, by using its powerful role in proprietary on-site clouds.
Krishna recognizes that IBM cannot compete with AWS and Azure in public cloud systems, so he plans to launch open-source computing applications to fill the gap between a client’s on-premise infrastructure and public cloud services. These solutions would be universally compatible with a variety of web providers.
That’s why IBM bought Red Hat, a company that makes open-source applications, and why it’s releasing more AI services that analyze information in the hybrid cloud. The specialized approach may sound enticing, but it ignores the reality that AWS is now extending its footprint in the cloud infrastructure and artificial intelligence industries.
For deploying AWS services inside an internal server, AWS now provides automated private clouds. It also offers hybrid cloud platforms across AWS Outposts, as well as an expanding set of AI and machine learning resources for processing all that info. In brief, AWS already does what IBM promises.
IBM’s ambitious spin-off and restructuring efforts will crash. For the near future, though, TechnyBaba thinks Amazon can remain a simpler, faster-rising, and much more open player in the rising cloud storage industry than Big Blue.