Few days ago Warren Buffett stated that he would buy more shares of International Business Machines Corp. (NYSE:IBM) from “time to time”. Investing in large cap tech stocks is always a good idea, and IBM offers a great return on investment. With innovation being the key to the company’s strategy, IBM has outgrown its peers whenever there’s been a technological shift.
Let’s have a look into the company performance and decide why it makes sense for investors to own it now.
Fundamentals
First and foremost, International Business Machines Corp. (NYSE:IBM) has returned over $150 billion to investors through share repurchases and dividends. That is a considerable amount of money for a company with a market cap of $226 billion. Secondly, let us look into the price to earnings (P/E) ratio of the company. At 11.14, the forward P/E of IBM is quite less compared to the industry standard. This means that IBM is not trading at a premium.
The stock price of International Business Machines Corp. (NYSE:IBM) has increased recently following a sell-off due to unexpected Q1 earnings. IBM has a very strong balance sheet and the revenue growth rate of the company has been always impressive.
Shift in strategy
IBM sacrificed low margin areas like hardware sales which were not paying off well. Instead, the company focused on increasing profitability and other value added business lines like services and software. This strategy was a masterstroke because International Business Machines Corp. (NYSE:IBM)’s bottom line was being hurt by the decline in PC sales. Apart from this, IBM has invested in trying to build a smarter planet and be differentiated in this fast-growing computing world.
The increasing shift to mobile devices is a testimony to the fact that IBM keeps itself abreast of the rapid changes. Not only this, it embraces those changes quite quickly and even innovates new ones. The revenue breakup of IBM confirms the shift in strategy, with majority of it coming from the services business followed by other businesses like software and technology.
Peers
International Business Machines Corp. (NYSE:IBM) is better positioned to succeed in the tough environment compared to its peers. The hardware segment of IBM is about three times larger than Oracle Corporation (NASDAQ:ORCL) . Few days ago, Oracle claimed that its servers are faster than IBM. However, the tests were not proven and IBM is still the leader in the server market. Oracle has been on the hook for disappointing results due to ineffective sales execution, but has jumped back after launching its cloud services with the acquisition of Taleo and Rightnow Technologies. Oracle Corporation (NASDAQ:ORCL) has given a higher return of 26% compared to the S&P 500 index. It has strong growth plans and restored investor confidence with its recent results.
IBM may lag behind Microsoft (NASDAQ:MSFT) if we compare them based on pure income. That is mainly due to the difference in current yields. But considering IBM’s buybacks, expected double-digit earnings growth, and dividend growth, it is a far more investor friendly stock than Microsoft. Having a strong presence in the software products segment, Microsoft needs a lot of investment in emerging technologies like big data and cloud computing. It can’t just rely on Windows 8 and the Surface Tablet, which are not accumulating enough revenue for the company.
Looking ahead
IBM is one company which stands out from the rest due to its strength of disrupted innovation. Growth initiatives like diversification into emerging markets and cloud computing efforts helped the company navigate smoothly during tough periods. Already, the initiatives have started producing results. Revenue from cloud computing services increased 25%, and its China and India businesses grew 4% year on year.
Smarter systems, such as power grids of food production and traffic congestion avoidance systems, signify the innovation IBM is known for. Another aspect of this smarter strategy is the launch of MessageSight, an application that helps organizations communicate with huge numbers of mobile devices. It can be used in automotive, healthcare, and finance.
Summary
IBM has slowly secured its ground by betting big on finding effective solutions to complex business issues. It is planning to invest in key areas like cloud computing, social media, big data, and mobile, and increased the dividend for the eighteenth consecutive year. Looking at all the factors, and specially on innovation and capital distribution, I recommend IBM as a strong ‘buy’ and believe the stock will provide a great return on investment in the future.
The article Why You Should Invest in This Stock Now originally appeared on Fool.com.
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