Founded in 1911, International Business Machines Corporation (IBM) is a multinational technology company headquartered in Armonk, New York. The company has operations in over 171 countries. Today, the company sells computer software, hardware, and middleware and provides consulting and computing services in different technological sectors.
The company has also always been a strong believer in research. It has managed to have the highest number of registered patents for the last 28 years.
I am neutral on IBM stock because despite having a strong competitive position within the information technology industry, an attractive dividend yield, and substantial upside potential relative to its average price target, its valuation multiples are elevated relative to its history.
Strengths
The core strengths of IBM are its strategic imperatives. These are its security businesses, cloud, social, data analytics, and mobile. Compared to last year, IBM’s revenue from these five sectors has climbed by 16%, and they also make up the company’s top line by 27%.
Over the years, revenue in these five sectors has seen a drastic increase, which is also why the company invests heavily in these sectors. That said, IBM also expects the demand for hybrid installations to grow. A hybrid installation combines cloud-based and local services for a larger business that does not want to move data to the cloud.
Recent Results
For the third quarter that closed on the 30th of September, IBM reported revenue of $17.6 billion, and its net cash from operating activities was $16.1 billion. Its adjusted free cash flow was $11.1 billion, and both of these numbers have increased by $0.3 billion in the last year.
IBM’s total revenue from its cloud services totaled $27.8 billion. According to its senior vice president James Kavanaugh, its cash generation was strong, and the company also maintained a robust balance sheet over the last quarter. IBM ended the quarter with $8.4 billion of cash in hand (including marketable securities).
Valuation Metrics
IBM stock looks a little bit overpriced at the moment. Its forward enterprise-value-to-EBITDA ratio is elevated at 9.8 times compared to its historical average of 8.95 times. Furthermore, its forward price/FCF ratio is 11.1 times compared to its historical average of 10.4 times.
Analysts expect the company to see revenue and EBITDA decline in 2022, while normalized earnings per share are expected to increase by 3.2%
Wall Street’s Take
According to Wall Street analysts, IBM earns a Moderate Buy consensus rating based on five Buys, four Holds, and one Sell rating assigned in the past three months. Additionally, the International Business Machines price target of $153.79 puts the upside potential at 14%.
Summary and Conclusions
IBM is a stalwart in the information technology space and has a multi-decade track record of paying steadily increasing dividends and helping to advance technology.
That said, the company has run into stiff competition with other tech giants that have been able to attract the best and brightest in the industry. As a result, IBM’s revenues have steadily declined in recent years, putting pressure on earnings-per-share growth.
While the dividend yield looks pretty attractive here, analysts are generally bullish on the stock, and the average price target implies pretty good upside potential for the stock over the next year, the valuation multiples are actually elevated relative to historical levels. As a result, investors might want to wait for a pullback in the stock price before adding shares.
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