Why the IBM Stock Price Is Rising Right Now

IBM stock priceThis week, the International Business Machines Corp. (NYSE: IBM) stock price has gotten a reprieve from what has been a long, painful downtrend, as it looks to break above new five-month highs.

After touching off $154.28 a share on March 13, the IBM stock price has been climbing. At yesterday's close (Monday), it was up to $164.63 - 6.7%. It's up 3.3% on the year.

It got a big boost yesterday on news that Big Blue was going to refocus its strategy in China. CEO Virginia Rometty confirmed that IBM was going to work with local Chinese tech firms to build out their IT infrastructure by sharing technology, Reuters reported.

But that's not the only positive development coming out of IBM.

Last week, IBM also began shipping its newest mainframe model, the z13, to its business clients.

IBM earnings show that over the last 11 quarters, the company has seen declining revenue. Among its hardest hit segments was hardware, which has seen revenue fall 12 consecutive quarters. That's why the z13 is so important right now.

The last three years have seen IBM's hardware sales fall from close to $6 billion to $2.4 billion - a drop of almost 60%.

This came largely as a result of where IBM was in the mainframe product cycle. The z12 was nearing the end of its run and IBM's business clients were anxiously awaiting its next model.

Mainframes make up about a third of IBM's hardware sales, Mike Chuba, a mainframe analyst at Gartner, told Money Morning. It's no wonder that sales were seeing a decline. And the z13 can only be good news at this point for a struggling IBM.

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The z13's big selling point is its ability to process mobile transactions with the security characteristic of IBM products.

An online mobile transaction triggers anywhere from 4 to 100 accompanying transactions in what is called the "starburst effect." The diagram to the right, from IBM, charts just how exhaustive this cascading effect can be.

That puts a lot of pressure on back-end systems processing transactions.

The z13, with the unmatched computing power typical of IBM mainframes, is designed to process an extremely high volume of mobile transactions - 2.5 billion a day, or 100 Cyber Mondays. This is all with the security that comes with the mainframe.

With the IBM-China partnership, and a product cycle refresh, IBM is making strides to reverse its troubles over the past couple years.

But don't be so quick to jump in on IBM stock just yet... It's still too early to recommend IBM as a "Buy."

Trouble Looms for the IBM Stock Price Today

IBM isn't going away anytime soon. It's too early to count them out - but there are very real concerns.

"Rometty can successfully turn the company around over the long haul," said Money Morning Defense and Tech Specialist Michael Robinson. "But earnings growth is the real challenge here. Rometty is a talented exec... but she has her work cut out for her."

IBM is making a shift focused primarily around Big Data and cloud computing. For all intents and purposes, IBM is already out in front in Big Data - the processing of seemingly unlimited amounts of raw structured and unstructured data to find solutions - with its Watson systems. But the Big Data shift is still very much in its infancy and IBM's advantages aren't as visible.

Cloud computing, however, has been a real struggle.

IBM does have a vast, high-profile pool of large business clients building their IT needs around IBM hardware. But with less companies building data centers around this architecture and opting for either data farms of low-end, x86 servers, or rented on-demand cloud services, IBM needs to be more competitive.

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IBM does offer several cloud services, such as SoftLayer and BlueMix, but it's in a crowded field in a market that's in transition. And these transitions are always harder for the IBMs of the world.

"I don't think the market knows what the endgame is yet, which is always a bigger problem for a larger firm," technology analyst Rob Enderle of The Enderle Group told Money Morning. "The smaller firms, we forget, a lot of them fail along the way and we remember the ones that survive. With the big firms, it has to survive; it doesn't have the option of failing and reemerging as another company. It has to morph."

And IBM is still hurting from a November 2013 bid for a $600 million CIA cloud computing contract it lost to Amazon.com Inc. (Nasdaq: AMZN). IBM knows security. It's been, for the most part, the sole supplier of the most secure computer out there with its mainframes. But on cloud computing, it simply didn't have the product when it bid on the contract, Enderle said.

"That was the big wakeup call," Enderle said. "The agency basically said they were given a choice between a company that didn't have any solution and one that did but wasn't secure enough."

They took the one that wasn't secure. And that was a big blow to IBM because, as Enderle said, "there's no way a 3-letter agency should have ever gone with Amazon."

That doesn't mean IBM stock is forever a "Hold" or a "Sell."

"IBM was designed to survive this stuff. It's a 100-year old company; the executives are one of the few executive teams that are formally trained throughout their career to deal with this kind of problem," Enderle said. "So it's built better than most to weather this kind of a storm in particular. It's just while it's weathering it you're going to notice the stress on the firm."

But you want to hold off on loading up on IBM stock right now.

The Bottom Line: IBM is not a bad company and it could very well emerge on the other end of this market transition as a leader. But right now the stakes are high and the chance for IBM stock price volatility is too great to justify diving in headfirst. If IBM's developments in Big Data and the cloud usher in the era of a new IBM, then investors may want to rethink. But right now, there's no evidence that this painful transition is over.

Tech Stocks Update for 2015... The Nasdaq is up over 5,000 this year and tech is on a roll. And Money Morning Defense and Tech Specialist Michael Robinson has for a while been bullish on Silicon Valley long term. As we approach the end of the first quarter of 2015, here's where Robinson is on tech stocks for 2015...

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