NEW YORK (TheStreet) -- IBM (IBM) has been cutting a clear path toward a higher-margin business through its willingness to walk away from its lower-margin hardware businesses, and further its aggressive entry into the cloud.
"They're making a pretty big bet on the cloud and over time that should offset some of the headwinds, certainly the structural headwinds on the hardware side," says Peter Wahlstrom, an equity analyst for Morningstar Investment Services. "They know that ... 'we might be a little bit smaller, but we should be more profitable.'"
The company on Wednesday reported its cloud revenue was up more than 50% in the first quarter, booking its third straight quarter of cloud revenue of more than $1 billion. For cloud delivered as a service, the first-quarter annual run rate was $2.3 billion, doubling year to year.
IBM is now well on target to meet or exceed its objective of $7 billion in cloud revenue by the end of 2015. With its cloud business ending 2013 at $4.4 billion in sales, IBM will now only need to grow at a compound annual growth rate of 26% over the next two years to reach that $7 billion goal. In first quarter, its growth rate was twice that rate.
While the company's cloud business has had an impact on IBM's x86 and Power hardware business, as cloud pursuits would do to every hardware provider, IBM's large software and services offerings in the cloud is enabling it to expand in areas where there is incremental, high-margin growth. Such areas include Software as a Service (SaaS), commerce, and workforce solutions.