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IBM Inks Hybrid Cloud Deal With Coca-Cola European Partners

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International Business Machines Corporation (IBM - Free Report) recently inked a multi-year deal with Coca-Cola European Partners (“CCEP”) to help the latter move to an open hybrid cloud environment.

IBM will deploy its Red Hat OpenShift and Red Hat Enterprise Linux solutions to assist CCEP in achieving operational efficiency by reducing expenses and streamlining its IT infrastructure.

Also, IBM’s multi-cloud technology will enable CCEP to integrate and run legacy systems, public and private clouds from the same dashboard.

This modernized IT infrastructure will facilitate CCEP to leverage the benefits of technologies like the Internet of things (IoT), data analytics and artificial intelligence (AI). This, in turn, will enable CCEP take better business decisions and offer enhanced services to customers.

The latest deal is a notable win for IBM as it reflects on strength of the company’s hybrid cloud platform and is anticipated to boost the company’s cloud revenues in the coming quarters.

Red Hat Buyout Fuels IBM’s Hybrid Cloud Ambitions

IBM is focused on enhancing revenue from its cloud business. The company is well poised to capitalize on the swift digital transformation taking place globally, caused by the coronavirus-led work-from-home wave. Enterprises are rapidly shifting from legacy systems to scalable, enterprise-tuned cloud platforms. As a result, there is immense scope for growth for software solution providers like IBM.

Particularly, strength in hybrid cloud vertical bodes well. Notably, hybrid cloud refers to a computing environment in which both private cloud and public cloud infrastructures can be used simultaneously. Synergies from acquisition of Red Hat are enabling IBM to bolster its Open Hybrid Architecture Initiative. In the second quarter of 2020, revenues from the cloud and cognitive software segment rose 3% year over year to $5.7 billion. Traction witnessed by Red Hat hybrid cloud solutions as well as growth in Data & AI, security, and IoT verticals led to the uptick.

Moreover, revenues from Red Hat in second-quarter 2020 improved 18% on a normalized basis. The hybrid cloud platform generated $23 billion of revenues in the past 12 months.

Markedly, more than 2,400 clients are using Red Hat and IBM’s hybrid cloud platform, and around 600 IBM Services clients are leveraging Red Hat technology. Some of the notable clients include Bharti Airtel, Vodafone, Broadridge Financial Solutions, American Express, and CaixaBank.

Persistent Risks

Increasing expenses on hybrid cloud platform amid stiff competition in the cloud computing market from the likes of Amazon Web Services (AWS), Microsoft’s (MSFT - Free Report) Azure and Google Cloud is likely to put pressure on margins, at least in the near term. Per Synergy Research Group data, IBM’s market share in second quarter of 2020 trails  AWS, Azure, Google Cloud and Alibaba. Hence, it needs to constantly strengthen its cloud platform with advanced capabilities to stay in the game.

Also, coronavirus crisis-induced sluggish spending across small and medium businesses owing to restricted economic activity, globally, is likely to exert pressure on adoption of IBM's cognitive applications and transaction processing platforms.

Zacks Rank & Key Picks

IBM currently carries a Zacks Rank #4 (Sell).

Apple (AAPL - Free Report) and Blackbaud (BLKB - Free Report) are a couple of better-ranked stocks worth considering in the broader computer and technology sector, both flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Apple and Blackbaud is pegged at 10.7% and 7.6%, respectively.

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