Stock Analysis & Ideas

IBM: The Not-So-Little Tech Stock That Could

Story Highlights

Clearly lacking in the pizzazz that other technology giants leverage, International Business Machines has long struggled for relevance. However, with an established track record taking precedence over the empty glamor, IBM stock could be interesting for the patient investor.

While never saying never, it’s doubtful that anyone will mistake International Business Machines (IBM) for an exciting technology firm. Commanding an enviable legacy, the company known as “Big Blue” lagged behind its peers as the industry abandoned hardware for digitalization-based initiatives such as cloud computing. However, under a paradigm now prioritizing dependability and resilience, the long-lagging company now looks intriguing. I am bullish on IBM stock.

Encumbered with legacy platforms that sent shares of International Business Machines mired in a years-long bearish trend channel starting from around the spring of 2013, various leadership teams have struggled to get the company on the right footing.

Fundamentally, Big Blue received a big boost from its acquisition of Red Hat for $34 billion, setting the future strategy of focusing on hybrid cloud services and accelerating open-source innovation to a wide range of enterprise-level clients.

Still, the problem for IBM stock was that the underlying firm came to the party late. With the tech industry marching on triple time or even quadruple time, merely walking at a fast rate wasn’t enough. Still, the rude intrusion of the COVID-19 pandemic may have helped provide a tech reset.

While IBM stock failed to dramatically capitalize on the disruption that COVID-19 created, it nevertheless did gain meaningfully from the spring 2020 lows. In addition, what sets Big Blue apart from the rest of the crowd is that it has kept its gains.

On a year-to-date basis, IBM stock is slightly above parity. On the other hand, giants like Microsoft (MSFT), Intel (INTC), and Cisco Systems (CSCO) are each down double digits. Intriguingly, this might just be the tip of the iceberg regarding IBM’s patient bullish narrative.

Interestingly, on TipRanks, IBM has a 7 out of 10 Smart Score rating. This indicates moderate potential for the stock to slightly outperform the broader market or at least perform in line with it.

IBM Stock May Benefit from Encouraging Q2 Results

More than a month has gone by since International Business Machines reported its results for the second quarter of 2022. However, it’s worth repeating some of the highlights.

IBM’s earnings per share of $2.31 beat the consensus estimate that called for $2.27. IBM beat revenue forecasts as well, generating $15.54 billion in revenue, while analysts were expecting $15.18 billion.

Drilling into the details provides additional insights. In the company’s Software segment, revenue increased to nearly $6.17 billion from approximately $5.8 billion in the year-ago quarter. Specifically, the Hybrid Platform & Solutions and Transaction Processing unit helped drive the robust sales result.

Further, Zacks Equity Research pointed out that the company “is witnessing healthy hybrid cloud adoption by clients, adding 250 clients in the second quarter alone, bringing the tally of hybrid cloud clients to more than 4,000.” Put another way, IBM is slowly starting to leverage its acquisitions and refocused strategies.

On the Infrastructure side as well, IBM posted strong results with sales of $4.24 billion, up from $3.56 billion one year ago. Per Zacks, the fiscal performance was mainly supported by “higher Hybrid Infrastructure revenues and the launch of z16 mainframe – an open, agile platform that integrates into a hybrid cloud environment with industry-leading security, data privacy, and latency.”

Now, TipRanks contributor Steve Anderson pointed out the problematic areas, which is fair. “As good as this was, it didn’t help when IBM noted that it was trimming its full-year forecasts. Management now looks for $10 billion in free cash flow, down slightly from the earlier-projected range of between $10 billion and $10.5 billion.”

Also, to be fair, IBM stock didn’t exactly respond well to the aforementioned trimming. Nevertheless, such criticism may be akin to comparing a marathon runner to a sprinter. For the patient, long-term buyer, the takeaway could be that IBM is finally advantaging its strengths in a very contested and troubled economic ecosystem.

Compelling Innovations Done Right

While many investors overlook IBM stock because of the underlying company’s extensive history of disappointments and laggardness, insisting that such trends will continue forward in perpetuity may be a mistake. In some cases, IBM brings compelling innovations to the table, including cybersecurity and artificial intelligence.

However, one of the most-discussed technologies these days is the blockchain. Although the decentralized distributed ledger commands the most attention for its association with cryptocurrencies, the reality is that the blockchain itself represents a utilitarian invention if harnessed appropriately.

Among the key attributes of this decentralized platform is the facilitation of a zero-trust network. Under traditional transactional processes such as banking, human operators perform the necessary role of intermediaries, confirming inbound and outbound flows along with accounting methods. However, humans make mistakes. Additionally, they are vulnerable to various temptations.

Under an immutable network, however, algorithms can essentially replace human actors, thereby improving efficiencies, lowering overhead, and mitigating fraud. However, with thousands of blockchains operating in the broader digital ecosystem, regulation and standardization present serious viability concerns.

Here, an institution the size and clout of IBM can fill the opportunity gap, making the future an exciting place for Big Blue.

Is IBM Stock a Buy, Sell, or Hold?

Turning to Wall Street, IBM stock has a Moderate Buy consensus rating based on five Buys, four Holds, and one Sell rating. The average IBM price target is $147.75, implying 9.7% upside potential.

Conclusion: An Old Flame Returns

Perhaps the best analogy for IBM stock comes down to a chance encounter with an old flame. With both parties having matured over the years, the subsequent relationship has the potential to turn into something great. It just requires a little bit of faith and the willingness to accept that this IBM isn’t like its prior self.

Disclosure

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