International Business Machines Corp. (IBM) recently opened a new data center in Frankfurt, Germany. This initiative is believed to be a part of IBM’s $1.2 billion investment plan intended to extend the company’s cloud footprint worldwide.
This new data center is expected to improve application performance by lowering latency for local customers. This, in turn, will enable German companies and people to meet the stringent German and European data security and sovereignty laws.
Currently, cloud technology adoption is on the rise in Germany. Between 2012 and 2013, the number of German enterprises using cloud increased 32%. Per the Experton Group, the cloud market in Germany is expected to be worth EUR 18 billion in 2017.
In Apr 2013, IBM had opened a cloud data center in Ehningen, Germany in order to help businesses follow the lead of customers such as Arnold Clark, Codorniu, Shanks, Centrax TCL and Development Alternatives Inc (DAI), who were using IBM's cloud-based social business services at that time.
We believe that IBM’s investments in new spheres including cloud computing, Big Data, mobile and security will boost software and services revenues in the long run. Nevertheless, we believe that these huge investments will weigh on the company’s profitability in the near term.
Of late, IBM has been focusing more on analytics and cloud-computing to combat a massive slowdown in hardware sales and a persistent softness in traditional software. The recently inked deals with the likes of WPP, Deutsche Lufthansa AG and its Group companies, Thomson Reuters and ABN Amro Bank (worth about $4 billion) will help it to gain significant traction in the cloud computing market.
Additionally, divestitures of loss making units mean that these will no longer be a drag on the company’s profit.
However, intensifying competition from the likes of Oracle (ORCL), Hewlett-Packard (HPQ), SAP (SAP) and Microsoft remains a major headwind. Further, sluggish IT spending particularly for on-premise and data center hardware will continue to hurt the company in the near term.
Currently, IBM has a Zacks Rank # 3 (Hold).
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