Big Blue Struggles With Underdog Reputation In Cloud Computing

NEW YORK (TheStreet) -- Big Blue's (IBM) future is unclear as it struggles to keep up with innovators and please investors.

Its share price has dropped 11% this year, versus a 23% gain for the S&P 500 Information Technology Index. The century-old tech company has reported eight consecutive quarterly revenue declines; its annual revenue has hovered at about $100 billion since 2007.

Chairwoman and CEO Virginia Rometty has said she wants to raise IBM's operating earnings per share to $20 by 2015. That's a long way from what it was in 2013, when the company had operating earnings per share of $16.28, according to its 2013 annual report.

Cloud computing has been the company's big hope for growth. Cloud provides companies or individuals with the ability to share information, applications, data sets and software platforms over the Internet on a pay-as-you-use basis. Especially useful for companies, cloud is a tool that allows employees to securely store, control and utilize applications, data and company information from emails to projects. Research firm IDC forecasts that the cloud computing market will grow to over $100 billion industry by 2017.

Since 2007, IBM has spent more than $7 billion on 17 acquisitions to accelerate its cloud initiatives, including $2 billion for SoftLayer Technologies. Other cloud-related companies purchased by IBM include Aspera, Cloudant, and Tealeaf Technology. IBM currently owns 1,560 patents focused on driving cloud innovation. Big Blue projects it will generate $7 billion in revenue from its cloud initiatives by the end of next year.

Nonetheless, IBM isn't growing big enough, fast enough. "We do like the way the firm is strategically going after cloud and analytics," said Peter Wahlstrom, an analyst at Morningstar. "However, these are areas other people are already playing into. There is a lot of competition."

According to UBS analyst Steven Milunovich, IBM needs to focus on reliable revenue growth as well as changing its cloud reputation. "A higher P/E would be driven by a return to consistent organic revenue growth combined with continued margin improvement. In addition, investors need to be convinced that IBM can be a winner in cloud and Big Data rather than a victim," Milunovich wrote in a May report.

IBM's troubles in cloud are illustrated by its difficulty competing for a CIA contract in 2012. Despite IBM's history with the CIA and its lower bid price, it lost out to Amazon (AMZN).

IBM challenged the CIA's choice by triggering a report from the U.S. Government Accountability Office. In June 2012 the GAO recommended that the CIA redraw parts of its contract and give IBM another shot to compete for the project. In response to these recommendations the CIA began to reopen negotiations. In July Amazon filed a legal complaint in the U.S. Federal Court of Claims, stating the CIA's corrective action was in violation of federal law and regulation.

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