It's been more than 50 years since International Business Machines (NYSE: IBM) launched its first mainframe computer. The world has changed drastically since then, with the personal computer, the internet, smartphones, and cloud computing each driving technological revolutions. But through all of it, the IBM mainframe has remained at the center of our digital lives.
Today, IBM mainframes process 87% of all credit card transactions. Twenty-nine billion ATM transactions and 4 billion passenger flight reservations run through IBM's hulking systems each year. IBM claims that 68% of the world's production workloads are run on mainframes at only 6% of the total IT cost.
Hardware sales account for a small portion of IBM's total revenue, but the mainframe drives sales of software and services, and well additional revenue via the company's financing business. IBM launches a new mainframe system every few years, prompting customers to upgrade. This drives a 4-5 quarter surge in mainframe sales for IBM.
The last such surge began in 2017 with the launch of the z14 mainframe. IBM's focus with the z14 was security – the system allowed for full-scale data encryption with no effect on system performance thanks to a vast increase in cryptographic hardware. The z14 was a major success, triggering the strongest mainframe upgrade cycle IBM has experienced in many years.
IBM z15 mainframe system. Image source: IBM.
Data privacy for a hybrid, multi-cloud world
IBM will be aiming to repeat that performance with the z15 mainframe system, which the company unveiled this morning. The z15 builds on the security credentials of the z14 while adding features aimed at ensuring data remains private, even across hybrid, multi-cloud environments.
In terms of performance, the z15 is a monster. The system can process up to 1 trillion web transactions per day and support 2.4 million Docker containers. Per core, the z15 supports 2.3 times more Docker containers than a bare-metal x86 system, according to IBM.
Beyond performance, data privacy is the big selling point of the z15. New features allow clients to enforce data access rules across private, public, and hybrid clouds, even after data has left the z15 system itself. This is an industry-first capability, according to IBM, and it doesn't negatively affect system performance.
IBM made a big bet on hybrid and multi-cloud environments when it acquired Red Hat for $34 billion. The company plans to bring Red Hat OpenShift, a container application platform, to its mainframe systems, as well as IBM Cloud Paks, which are containerized software solutions that run on the OpenShift platform. The mainframe is a key part of IBM's hybrid multi-cloud strategy.
A sales boost in 2020
It will probably be a few months before IBM begins shipping z15 systems, if the z14 launch is any indication. The surge in mainframe sales from upgrading customers will mostly occur in 2020, which should drive some revenue growth for IBM. IBM grew revenue in 2018 thanks to the launch of the z14, but sales have started to slip again as the mainframe product cycle reached its end.
Also boosting sales next year will be Red Hat, which was growing at a double-digit rate prior to being acquired. IBM sees a big opportunity to cross-sell products and services, and the mainframe fits in with that strategy. Among IBM's largest clients with little to no Red Hat spend, the company sees a $1 billion annual opportunity for every 5% of those customers that adopt Red Hat. IBM will no doubt be pushing its mainframe customers to buy Red Hat products.
With a new mainframe on the way, 2020 should be a good year for IBM. The z15 will give IBM an opportunity to drive adoption of Red Hat products, as well as a meaningful revenue boost from hardware sales and financing activity.
Whether that's enough to finally drive a recovery in the stock is another question entirely.
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Timothy Green owns shares of IBM. The Motley Fool is short shares of IBM and has the following options: short January 2020 $200 puts on IBM, short September 2019 $145 calls on IBM, and long January 2020 $200 calls on IBM. The Motley Fool has a disclosure policy.
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