IBM (NYSE:IBM) Chief Executive Ginni Rometty’s $34 billion bet on open source software provider Red Hat last hasn’t been the “game-changer” she promised investors. The company’s most recent earnings report was particularly worrisome because it included results from the recently-closed Red Hat deal.

Why You Shouldn’t Give Up on IBM Stock More

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Overall sales at the Armonk, NY-based company slumped for the fifth straight quarter and for the 27th time overall under Rometty’s leadership. Quarterly revenue fell 3.9% to a disappointing $18 billion. Red Hat was a bright spot, generating a better-than-expected $371 million, a “normalized gain” of 20% compared with the previous year.

A Hybrid Strategy for IBM Stock

Under Rometty’s leadership, IBM is pursuing a “hybrid” cloud strategy with Red Hat providing enhanced security services on private and public clouds. In theory, IBM would partner with leading providers such as Amazon (NASDAQ:AMZN) Web Services (AWS), which dominates the $70 billion global cloud infrastructure services market. She has no other choice given how badly IBM is lagging in the fast-growing market.

Synergy Research Services pegged the Seattle-based company’s cloud market share at about 35% in a 2019 report, followed by Microsoft’s Azure with 15%. IBM was fourth with less than 10%.

“Enterprises are in the early phases of their journeys to modernize their infrastructures to deliver savings, productivity, and innovation,” said IBM Chief Financial Officer James Kavanaugh in the company’s latest earnings conference call. “We are ideally positioned to move our clients to the cloud and derisk the journey for them. We’ve been shifting our portfolio to capture this opportunity, investing in our cloud capabilities while deemphasizing and exiting certain lower-value content.”

Big Blue Has Problems

Unfortunately for owners of International Business Machines stock, the rest of Big Blue isn’t doing so hot.

IBM’s Global Technology Services (GTS) and Global Business Services (GBS), which had been cash cows for the company in the past, struggled in the most recent quarter. Revenue at GTS, which includes IBM’s cloud business, fell 5.6%to $6.7 billion. GBS reported sales of $4.1 billion, an increase of 1%. It includes IBM’s consulting operations.

Revenues in Systems, which includes mainframe computers and other hardware, slumped 15%to $1.5 billion while Global Financing plunged 12% to $343 million.

Shares of Big Blue rose 15% in 2019, under-performing the S&P 500, which gained about 30%. Shares of IBM are currently trading at about a 10% discount to the median price target of Wall Street analysts of $148.50. Most analysts rate IBM stock as a “hold,” which seems right to me given its slowing growth.

I expect the stock to tread water for the foreseeable future, given the challenges it faces in its cloud business and elsewhere. About the only way I can see the stock moving is if an activist investor takes a position in IBM stock. Though such a scenario is unlikely given the size of IBM, stranger things have happened.

As of this writing, Jonathan Berr does not own any shares of the aforementioned stocks.

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