Motley Fool
0
All posts from Motley Fool
Motley Fool in Motley Fool,

IBM May Never Catch Amazon in the Cloud, and That's OK

Image source: IBM.

Cloud computing is synonymous with Amazon's (NASDAQ: AMZN) AWS, and for good reason. The online retailer's cloud-computing segment is nearing a $10 billion annual revenue run rate, with double-digit growth showing no sign of slowing down. Companies large and small depend on AWS, and it's not hyperbole to say that Amazon has drastically altered the IT landscape.

International Business Machines (NYSE: IBM) also has a large cloud business. The company generated $10.2 billion in cloud revenue during 2015, but that number includes hardware, software, and services, making it incomparable to AWS. IBM's cloud-delivered-as-a-service reached a $5.4 billion annual run rate at the end of the first quarter, but since this is mostly comprised of software, it's also not comparable to AWS, which offers mostly infrastructure-as-a-service (IaaS).

SoftLayer, IBM's IaaS business, is dwarfed by AWS. The company has a goal of reaching $1 billion in IaaS revenue this year, but that would still make Amazon's cloud-computing business about 10 times larger. Deutsche Bank analyst Ross Sandler, who rates IBM stock a hold due to growth concerns, believes that IBM will never catch up with Amazon, or even Microsoft, in the cloud. In the public IaaS market, Sandler believes that IBM doesn't have a chance.

IBM will almost certainly never be the largest IaaS provider, or even the second largest. But the company's cloud strategy, which focuses on delivering high-value software and services, as well as helping companies transition to the cloud, doesn't require IBM to be an IaaS leader.

IBM's cloud

Scale is important in the IaaS market. Amazon, being so much larger than any of its competitors, can drive down prices for virtual machines and storage. IBM's SoftLayer doesn't try to compete with Amazon on price. Instead, it goes after enterprise customers, offering bare metal servers that provide higher performance at a higher cost.

IBM's cloud strategy goes well beyond SoftLayer. Bluemix is the company's platform-as-a-service offering. PaaS adds another layer of abstraction, allowing developers to avoid managing virtual machines and storage directly. Instead, developers focus on building their applications, with the underlying infrastructure required to run those applications handled by the platform.

Through Bluemix, which is powered by SoftLayer, IBM offers a wide variety of services. Over a dozen different APIs that utilize Watson, the company's cognitive computing system, are available to developers, allowing for the easy integration of features like speech-to-text and image recognition. Data analytics, security, and a wide range of other services are also available to developers, including third-party services offered by other companies.

These services, many unique to IBM, are the key to the company's cloud strategy. IaaS seems more like a means to an end for IBM, facilitating the delivery of high-value services through the cloud. Bluemix can also be used in a hybrid cloud or private cloud environment, giving large organizations with complex IT systems far more control compared to moving entirely to a public cloud like AWS.

Beyond its cloud platform, IBM's services business is also shifting more heavily toward the cloud. The company is becoming more of a services integrator rather than a systems integrator, said CFO Martin Schroeter during IBM's latest earnings conference call. The cloud hasn't really made IT any simpler, and IBM will continue to play a major role helping organizations with their IT needs.

While Amazon focuses on being the low-cost provider of IaaS services, IBM is going after the highest-value portions of the cloud computing market. The company's cloud strategy is summed up well by what CEO Virginia Rometty said during a conference last year:

What's important is that we grow in the right areas. Tech is littered with areas that you can have high growth and make no money. That's not us.

IBM will never be the largest cloud-computing company in the world. And that's just fine.

Something big just happened
I don't know about you, but I always pay attention when one of the best growth investors in the world gives me a stock tip. Motley Fool co-founder David Gardner (whose growth-stock newsletter was the best performing in the U.S. as reported by The Wall Street Journal)* and his brother, Motley Fool CEO Tom Gardner, just revealed two brand new stock recommendations. Together, they've tripled the stock market's return over the last 13 years. And while timing isn't everything, the history of Tom and David's stock picks shows that it pays to get in early on their ideas.

Click here to be among the first people to hear about David and Tom's newest stock recommendations.

*"Look Who's on Top Now" appeared in The Wall Street Journal in Aug. 2013, which references Hulbert's rankings of the best performing stock picking newsletters over a 5-year period from 2008-2013.