Remember when IBM had years of stagnation and declining investor returns?
Now, a successful turnaround at International Business Machines (NYSE:IBM) is finally taking hold.
For the first time in over a decade, IBM stock is rising and outperforming many of its peers. In the last 12 months, it has risen 34%, including a 19% gain so far this year. It’s a welcome change for a stock that many analysts had written off. It was seen as a value trap that experts urged investors to avoid. Its stock is returning to the level it was at in 2013. That was the time when it last peaked and then entered a decade of darkness.
Turnaround Takes Hold
IBM has a storied past.
It reached its pinnacle as it helped to usher in the personal computing era of the 1970s and 1980s. At various times, the company was the world’s most valuable publicly-traded concern. Also, it’s responsible for many revolutionary technologies. Importantly, those include the floppy disk, the hard drive and automated teller machines (ATMs) used by banks. Six of IBM’s employees have won Nobel Prizes in scientific fields.
But since the dot.com bubble burst in 2000, IBM lost its way. It fell behind as the technology industry pivoted to the internet age that brought us smartphones, e-commerce and social media. Big Blue struggled with an outdated business model that focused largely on computer hardware and an army of information technology consultants to maintain it for third parties. But, after years of failed turnaround attempts, IBM finally appears to have gotten its house in order.
Spin-Off and Acquisitions
A key to IBM’s success has been the 2021 spin-off of its legacy infrastructure services unit into a new publicly-traded company called Kyndryl (NYSE:KD). Kyndryl includes IBM’s previous service operations. Those include its IT consultants who manage client data centers and provide traditional IT support to other companies. Thus, the spin-off has freed IBM up to concentrate on more lucrative business opportunities such as cloud computing, machine learning, artificial intelligence (AI) and supercomputers.
Today, IBM is the world’s largest industrial research organization and holds more patents than any other U.S. business. Another key to the company’s success has been its acquisition strategy. In 2019, IBM completed a purchase of software maker Red Hat for $33.4 billion in what was then its largest deal ever. Red Hat, known for software and services based on the open source Linux operating system, gave IBM an immediate cloud revenue boost as well as a suite of proven software products.
In April of this year, IBM announced its acquisition of cloud software maker HashiCorp (NASDAQ:HCP) in a deal valued at $6.4 billion. HashiCorp is expected to complement IBM’s independent subsidiary of Red Hat. Indeed, it has contributed strongly to IBM’s revenue growth in recent years. The HashiCorp deal is expected to close by year’s end.
Strong Results
In late July, IBM reported second-quarter financial results that exceeded Wall Street forecasts, raising confidence among analysts and investors. The company reported EPS of $2.43 compared to $2.20 that was the consensus expectation among analysts. Revenue in the quarter totaled $15.77 billion, which surpassed estimates of $15.62 billion. Management attributed the strong results to a rebound in technology spending, as well as spending on AI.
IBM said its book of business for generative AI now stands at more than $2 billion, which is double the $1 billion it was this past April. Software business revenue totaled $6.74 billion at the end of Q2, up 7% year-over-year (YOY) and more than the consensus forecast of $6.49 billion. Looking ahead, IBM expects 2024 free cash flow of more than $12 billion. IBM stock rose nearly 5% on news of its Q2 print.
Buy IBM Stock
There was a time when it looked as though IBM would never regain its mojo. The once-great company appeared to have been left behind and replaced by the mega-cap technology stocks known as the “Magnificent Seven.” Howeverm reports of IBM’s death appear to have been premature. After a decades-long struggle, the company looks to have finally made the difficult decisions and maneuvers needed to get its business back on track. The end result is a company that may finally be on the comeback trail. Therefore, IBM stock is a buy.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.