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What Are Some of the Issues IBM Needs to Address?

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Competition is heating up at a rapid pace

IBM’s competition is expected to intensify as every player in the industry is trying very hard to increase its share in the SMAC (or social, mobile, analytics, and cloud) space. Just like other legacy players, including Microsoft (MSFT), Oracle (ORCL), and HP (HPQ), IBM (IBM) is also in a multi-year transition. Sluggish IT spending, especially on on-premise and data center hardware continues to be a source of concern.

To gain diversified exposure to IBM, you can invest in the Technology SPDR (XLK). XLK invests 3.51% of its holdings in IBM.

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Falling revenues and nonexistent growth

All the leading technology companies including IBM are vying for the cloud and big data space to generate more revenues as the traditional software licensing market goes through a sluggish phase. In 2014, cloud revenues stood at $7 billion with cloud offerings delivered as a service at an annual run rate of $3.5 billion. As the above presentation shows, IBM’s revenues have continued to decline in the last couple of years. IBM has posted declining revenue in the last 11 quarters. IBM reported revenues of $24.1 billion and $92.79 billion for 4Q14 and fiscal year 2014, respectively, a decline of 12% and 6% on a year-over-year basis.

Owing to slow demand in the software sector and divestitures of sizable businesses, including the x-86 server, microelectronics, and customer care divisions, IBM’s revenue and growth suffered. IBM has shared its plans to invest billions of dollars in strategic areas of cloud, big data, analytics, and mobile and security that is expected to drive its future growth. However, falling revenues, margins, cash flows, and rising debt flows do little to restore faith in the prospects of the company.

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