This company continues to show unexpected power in the cloud

Cloud computing remains a fragmented, multi-player industry. While much of the general attention seems to be focused on major players such as Amazon Web services and Microsoft‘s Azure, many other companies have built successful niches in this growing technology sector.

For example, two segments within the cloud sector — infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS) — have concentrated vendor market share with the longtime tech giant. International business machines (IBM) 0.09%† Let’s take a closer look at how IBM is showing surprising power in the cloud and what this could mean for investors.

An employee performs work on a laptop in a data center.

Image source: Getty Images.

IBM’s place in the cloud

According to market research firm ITCandor, IBM accounted for approximately 15% of vendor revenue share in 2021. While that still lags 26% behind Amazon, it leads competitors like Microsoft, Alphabet‘s Google Cloud, and Alibaba

IaaS and PaaS vendor market share for global revenue.

Image source: Statista

Under Arvind Krishna, who took over as CEO two years ago, IBM has built on its acquisition of Red Hat and spun off the company’s infrastructure services business into a separate entity that now operates as Kyndryl

These steps have made IBM much more of a cloud company focused on the hybrid cloud, a product that allows public and private clouds to communicate with each other. Hybrid cloud revenue grew 20% in 2021, accounting for just over a third of IBM’s total revenue. This emphasis also makes it the world’s fifth largest player in infrastructure clouds, even when considering infrastructure-related revenues only.

Global market share of cloud infrastructure providers.

Image source: Statista

Don’t forget the finances

The market cannot fully appreciate IBM’s cloud capabilities. After years of negligible sales growth, sales rose 7% in the fourth quarter, the quarter in which the Kyndryl spin-off took place. In addition, the company forecasts medium-single digit growth and $35 billion in free cash flow going forward in the three-year period between 2022 and 2024. This should fund the dividend, which cost the company $5.9 billion in 2021.

This dividend pays shareholders $6.56 per share per year, a cash yield of 5% at current prices. Additionally, being a dividend aristocrat, IBM will likely choose to increase its dividend each year to maintain that status, making it a safe bet regardless of market conditions.

IBM stock is sold at a price-to-earnings ratio of about 21, suggesting it trades at a discount to the market average and much lower than many technology stocks. This is likely due to the lackluster sales and inventory performance of the past decade. However, with revenue growth accelerating and a significant growth impediment removed, IBM’s fortunes may undergo a much-anticipated reversal.

Is cloud power a reason to consider IBM?

Despite its significant share of cloud revenue, IBM is just starting to capitalize on its image as a cloud company. It has gained increasing recognition in the cloud industry and has long been responsible for a significant portion of vendor revenues in IaaS and PaaS. With a relatively low earnings multiple and a generous, rising dividend, IBM could become the cloud stock of choice for income and potentially growth-oriented investors.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium consulting service from Motley Fool. We are fur! Questioning an investment thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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