IBM with Nobias technology: Is The Turnaround Finally Here?
International Business Machines (IBM) has been a perplexing stock for investors to follow over the last decade or so. “Big Blue” as the company is called, was a leader - potentially even the top dog - in the tech sector prior to the digital age. However, unlike many of its “old tech” peers, IBM has not been able to transition into the new growth sectors (cloud, digital security, artificial intelligence, software-as-a-service, etc) effectively.
It wasn’t long ago that IBM had gone more than 20 quarters in a row posting negative y/y growth. The company’s fall from grace was a long and arduous process, with its shareholders experiencing massive underperformance relative to its peers, the tech sector, and the broader markets at large.
IBM’s underperformance throughout the last decade has caused its valuation to crater to near single-digit price-to-earnings ratio levels. And now that IBM has generated positive top-line growth for two quarters in a row, investors are starting to ask themselves, “Has this format stalwart finally turned the corner?”
Cheap stocks are difficult to find in the tech sector and if IBM can sustain a positive growth rate moving forward, its shares could be a last bastion of hope for value investors. So, with all of this in mind, we wanted to take a look at what the credible analysts that the Nobias algorithm tracks have had to say about the stock during the past week in response to its positive Q2 earnings results.
When writing about what to expect in IBM’s Q2 results, Richard Saintvilus, a 5-star rated Nobias analyst, mentioned that IBM “has always been a great stock to buy for dividend investors. But has the company become more appealing to growth investors as well?” In his piece, he touched upon IBM’s lackluster performance in recent years saying, “Not only has the tech giant struggled to grow revenue over the past decade, IBM has been left out of the massive economic expansion that saw cloud leaders such as Amazon (AMZN) and Microsoft (MSFT) produce double-digit revenue gains.” “But,” he continues, “as the company transitions away from its legacy businesses, IBM’s turnaround has seemingly begun. Thanks to the Red Hat acquisition, which modernized its cloud business, IBM’s cloud ambitions have shown some promise in recent quarters.”
Saintvilus highlights IBM’s recent RedHat acquisition and the company’s fierce focus on the hybrid cloud market, where it hopes to compete for a large slice of the growing market share. With regard to the hybrid cloud space, Saintvilus writes, “according to Mordor Intelligence, the Hybrid Cloud Market — which was a $52 billion market in 2020 — is forecasted to reach $145 billion over the next five years, rising at a compound annual growth rates of almost 20%.”
So, if IBM is able to capture, maintain, or even grow market share in this industry, it could very well be the ticket for a return to growth and a much higher share price. Saintvilus concluded his piece saying that if IBM can continue its cloud improvements into the coming quarters, and accelerate its revenue growth to a double digit clip by the end of 2022, “IBM stock may finally recapture the $200 mark.”
Alan Farley, a Nobias 4-star rated analyst summed up IBM’s Q2 results concisely in the article that he published this week at Yahoo Finance saying, “International Business Machines Corp. (IBM) is trading higher by 3% in Tuesday’s pre-market after posting the strongest quarterly growth in three years. The old school tech behemoth reported a Q2 2021 profit of $2.33 per-share, $0.04 higher than estimates, while revenue rose a modest 3.4% year-over-year to $18.75 billion, $400 million higher than consensus. The company issued inline fiscal year guidance, expecting adjusted free cash flow of $11– $12 billion based in July exchange rates.”
During Q2 IBM saw RedHat’s revenues increase by 20%. Overall, the company’s cloud revenue posted strong gains as well and now, over the last 12 months, IBM’s cloud segment has posted 13% growth. This figure dwarf’s the company’s overall growth rate; however, after IBM spins off its legacy infrastructure business later this year and becomes a more cloud oriented company, it’s likely that we’ll see the new-IBM grow at a rate that is much closer to its cloud segment’s performance.
After these results, we’ve seen a handful of credible analysts increase their price targets on shares. For instance, this week we saw two highly rated Wall Street analysts, Keith Bachman of BMO Capital, who is rated 5-stars by the Nobias algorithm, and Katy Huberty of Morgan Stanley, who has a 4-star rating according to the Nobias algorithm, raised their price targets to $155 and $164, respectively. Overall, looking at the credible analysts that we track, we see an average price target of $159.00, which compared to IBM’s share price today of $141.34, implies upside potential of approximately 12.5%. And it’s interesting that the average price target is so high, because according to Farley, a rally into the mid-$150 level is what IBM needs to break out of its multi-year slump (from a technical perspective).
In his article, Farley wrote, “IBM topped out at 215.80 in 2013 and entered a brutal decline that posted an 11-year low in March 2020. The subsequent uptick reached an 8-year trendline of declining highs in June 2021, yielding a quick rally, followed by a failed breakout that reinforces the secular downtrend. A buying spike above 153 is now needed to mount this substantial barrier but that seems unlikely because the stock has been under active distribution for the last 18 months.” And, what is probably the most attractive aspect of IBM shares as a turnaround story is the company’s high dividend yield which implies that investors who buy shares today in hopes of future growth coming to fruition will likely be paid handsomely while they wait.
IBM’s current dividend yield is 4.66%. This is well above the roughly 1.3% yields that both the S&P 500 and the U.S. 10-year yield offer at the moment, making IBM a much more attractive relative asset for income oriented investors to focus on. Not only does IBM have a high yield, but the stock is a dividend aristocrat with a 26-year consecutive dividend increase streak. Although IBM’s annual increases have slowed as of late (as the company has struggled to produce sales/earning growth) many income oriented investors still rely on IBM for technology sector exposure. And after the Q2 results, Nicholas Rossolillo, a Nobias 5-star rated analyst who writes for The Motley Fool, highlighted IBM’s income oriented prowess in an article titled, “3 Reasons IBM Is A Top Dividend Stock After Reporting Q2 2021 Earnings.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Rossolillo began his piece highlighting the company’s “underrated” cloud sales. He points out that RedHat’s hybrid cloud sales growth is accelerating; in Q2 and Q3 2020, Redhat produced 17% growth, In Q4 2020 this rose to 19% growth, it dipped a bit in Q1 2021, back down to 17%, however, the 20% growth figure that Redhat posted in Q2 2021 is very bullish in his eyes. Then Rossolillo continued, pointing out the strong free cash flows that IBM geneates saying, “Through the first six months of the year, free cash flow was $2.56 billion, handily covering the $1.47 billion it paid out in shareholder dividends.” Finally, he mentions IBM’s improving balance sheet.
Rossolillo points out that “At the start of 2021, IBM had $61.5 billion in debt, so the old tech firm has reduced its liabilities to bondholders by some $6.3 billion so far this year -- and reduced debt by $17.9 billion since the purchase of Red Hat back in 2019.” All in all, he concludes, “Put another way, IBM's current dividend yield of 4.7% is a solid bet right now.” And, he isn’t the only one who thinks this. In a recent article, Martin Baccardax, who is a Nobias 4-star rated analyst who works at TheStreet.com, highlighted a tweet posted by noted CNBC analyst Jim Cramer shortly after IBM’s Q2 results were posted. Cramer said, “IBM beats top and bottom with strong Red Hat... and dividend safe . big f/c/f”.
Overall, the response to IBM’s Q2 has been very bullish. We’ve seen blue chip (4 and 5-star rated analysts) post 15 reports about the company since July 19th when the quarterly results were published and 10 of these articles came with “Buy” ratings attached. 77% of the credible analysts that Nobias tracks remain “Bullish” on IBM shares, which appears to point towards more upside ahead.
Disclosure: Nicholas Ward has no position in IBM. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.