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IBM Just Bolstered This Critical Business

Source The Motley Fool

International Business Machines' (NYSE: IBM) strategy centers around hybrid cloud computing and artificial intelligence (AI). In the cloud computing market, IBM's acquisition of Red Hat forms the foundation of its hybrid cloud platform. For large companies and organizations looking to modernize their infrastructures and applications, aiming to save money, remove the burden of legacy tech, or deploy new technologies like AI, IBM's hybrid cloud platform offers a path forward.

IBM's strategy in AI is similar. The company launched its watsonx AI platform last year, providing enterprise clients with a platform for developing, training, deploying, and managing AI models and agents. Since that launch, IBM has booked about $3 billion worth of business related to AI and is now adding more than $1 billion of new business each quarter.

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While these software platforms are at the center of IBM's overall strategy, it's the consulting business that's ultimately doing a lot of work. Large organizations need not only software but also guidance, solutions, implementation, and other services as they go through complex and prolonged modernization efforts. A company with on-premises servers running outdated applications needs a lot of help transitioning to a hybrid cloud architecture and deploying new AI workloads.

Remember that $3 billion of AI-related business? About 80% of that total was consulting bookings, with the rest coming from software. IBM's consulting business is a key differentiator for the company as it goes after the hybrid cloud computing and enterprise AI markets.

A smart acquisition

One important aspect of IBM's consulting business is that it's free to construct solutions for clients involving non-IBM products and services. Through a wide range of partnerships, IBM's consulting arm builds solutions involving competing cloud platforms, like Amazon (NASDAQ:AWZN) Web Services (AWS) and Microsoft (NASDAQ:MSFT) Azure, and competing software from companies like Oracle. This agnosticism is one reason IBM's consulting business works.

On Thursday, IBM announced that it planned to acquire Applications Software Technology, a global Oracle consultancy. IBM competes with Oracle in multiple areas, but the company also recognizes that armies of potential customers currently use Oracle software. By serving those customers and their Oracle-related needs, IBM can bring in new clients and potentially sell them additional products and services down the road.

Because much of Oracle's software is mission-critical, a client going through a modernization effort is likely to stick with Oracle software. With this acquisition, IBM broadens its ability to serve those clients.

Betting on partnerships

IBM's growing collection of strategic partnerships, like the partnership with Oracle, is bringing in billions of dollars in business that IBM otherwise wouldn't win. In the cloud computing market, these partnerships are particularly important. While IBM has its own public cloud platform, a potential client will most likely want to use AWS, Azure, or some combination of the two. By building solutions that involve the technology clients want or need, IBM opens the door to far more business than it would otherwise win.

While IBM stock trades near its all-time high, the company is performing well as its platform and consulting strategies pay off. The company expects to generate in excess of $12 billion in free cash flow this year, and that number has the potential to grow further in the years ahead. Based on that forecast, IBM stock trades for about 17 times free cash flow.

This Oracle consultancy acquisition may not be a major development, but it's another step that drives the company's consulting strategy forward. As enterprises race to modernize, IBM is increasing its appeal as the partner of choice.

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Timothy Green has positions in International Business Machines. The Motley Fool has positions in and recommends International Business Machines and Oracle. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.

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