Is Big Blue A Stock For You?
IBM, for all the disappointment it has given its shareholders over the past decade, actually has a lot of things going for it during the coronavirus pandemic. Remote-work and video conferencing are a friend to IBM, the transition into hot tech growth areas such as 5G networks, artificial intelligence, the cloud, and quantum computing plays into IBM’s strength. Their 34 Billion dollar Red Hat acquisition in 2019 has started to positively impact IBM’s 2020 1Q revenues, and the architect of the deal, Arvind Krishna, became the new CEO for the company at the beginning of the year. Finally, IBM is a solid value buy for a giant tech company that pays a very nice dividend. So while IBM trails Amazon, Microsoft, and Google significantly in the cloud space, the company has the potential to gain some ground and earn some respect on Wall Street under Krishna’s forward-thinking guidance.
The coronavirus forced companies to have their employees work from home. Many are going to continue once the pandemic is over. IBM has been leading a giant effort to help its clients transition to and manage remote work operations. There is a shift in spending to cloud providers and security and away from PCs and servers. Those companies on the cloud most likely will emerge stronger as their employees work from home. IBM’s effort to expand its AI and cloud expertise to its clients during this period of transition should accelerate its growth in the space. “The key area of focus is to ensure that IBM leads into two major transformational journeys our clients are on, Cloud and AI,” CEO Arvind Krishna said in IBM’s first-quarter earnings call. “I believe that what we are going through today with the shift to remote work, automation, application modernization will accelerate our client shift to hybrid cloud. This gives me immense confidence in our future.”
Growth for IBM will likely rise further as Krishna seeks to de-emphasize or sell lower-performing divisions. The global hybrid cloud market is estimated to grow in size from $36.14bn in 2017 to $171.93bn in 2025. David Parker, global partners and alliances for IBM at Red Hat, sees IBM and Red Hat is a great fit by, “Teaming together to deliver mutual clients open hybrid cloud solutions that leverage the industry expertise IBM has had for years combined with Red Hat’s proven technology and platforms.” I feel this gives IBM a competitive edge as a cloud provider. And with the coronavirus onset, their merging paths come at a better time. Also, The global artificial intelligence market size is expected to reach USD 390.9 billion by 2025, and IBM has been developing this technology longer than any other tech company. In the 5G arena, the market size is expected to reach 58.17 Billion dollars by 2025. IBM entered the segment in May, announcing that it is releasing new edge computing solutions and services, powered by Red Hat, designed to help enterprises roll out, deploy, and manage 5G networks. Finally, Quantum computing may represent early-stage technology, but the market potential is enormous. And IBM has been a major force towards pushing this next-generation computing development into the spotlight. Actually, they have been focused on this for some time. So, as I’ve laid out, IBM is right at the forefront of the hottest tech segments out there today. I definitely see them as a growth stock, because they have an abundance of knowledge and expertise, a strong free cash flow (reaching 11.9B last year) to support all of their endeavors, and seems to be thriving under Krishna’s new leadership.
In times like these on Wall Street, where huge gains are paired with huge losses, it helps to find a stock that pays their shareholders a great dividend. IBM is one of the few big tech companies that do. This means that it doesn’t matter if the market is up or down for the day, you’re guaranteed to make money on your dividends. And IBM pays the 4th highest dividend of all Dow Jones stocks. On top of that, it has recently become a Dividend Aristocrat. On April 28, the company announced it would be increasing its dividends for the 25th year in a row. The $0.01 means that investors will be earning $1.63 per share every quarter. At a price of around $117, that means the dividend yielding 5.56% per year. Josh Peters said, “Dividends may not be the only path for an individual investor’s success, but if there’s a better one, I have yet to find it.” Checkmark, IBM.
Finally, because of IBM’s checkered past, along with a current balance sheet that raises some red flags, IBM can be bought right now at a nice discount. IBM’s stock hasn’t shown a lot of volatility since early April, which is nice. The company is trading well below its fair value, and it’s PE Ratio is much lower than its industry average, both good signs. Finally, when do you find an iconic tech giant trading at 27.5% below its fair value? I feel that IBM is re-positioning itself as an industry leader in cloud services, which is so vital in businesses moving towards a remote-work model. The company is also at the forefront of other emerging tech segments as well. Wall Street tells a story of IBM as being a stalled business, left behind by the trail-blazing companies named Microsoft, Amazon, and Google. But inside this battered business lies a fantastic long term growth story developing beneath the surface. Because of it, the dividend you receive, and the price you can pay right now, I’m all in on IBM.
Disclaimer: This material should not be considered investment advice. After Further Review…The Stock is Reversed or Bob Schless are not registered, investment advisors. Under no circumstances should any content from this blog, website, articles, videos, seminars or emails from After Further Review…The Stock is Reversed or Bob Schless should be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for speculative purposes only.
Bob Schless
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