Should I Buy IBM? 3 Pros, 3 Cons

by Tom Taulli | July 18, 2013 2:35 pm

The last time IBM (IBM[1]) reported its earnings, the company whiffed, so there was lots of trepidation as investors waited for the Q2 announcement.

The earnings report, which came out after hours yesterday, showed mediocre results. The most troubling item was the top line; revenues were off 3.3% to $24.9 billion, missing Wall Street’s expectations of $25.3 billion.

However, IBM did manage to do better with its bottom line. IBM posted earnings per share of $3.91, which beat the consensus estimate of $3.78. The company also upped its full-year EPS forecast to $16.90 from $16.70.

So should you buy IBM shares here with the thought that all might not be great, but at least good — or should you wait for a better price amid its recent little upswing?

Pros

Megatrends: The future looks bright for tech operators like IBM thanks to megatrends like the cloud, mobile, social media and Big Data. And IBM has been aggressive on most of those fronts, including boasting one of the largest global cloud infrastructure platforms and a wide assortment of applications. As for mobile, the company has a top-notch infrastructure and recently launched its MobileFirst initiative, which has the goal of making all the apps mobile. But Big Data could be the holy grail. Since 2005, IBM has spent more than $24 billion on acquisitions for companies in the space. The true potential for Big Data is developing cognitive systems, which will help understand trends, detect problems, find opportunities and provide for better forecasts — the kinds of things that make companies much more competitive.

Dealmaking: Even with its R&D prowess, IBM still realizes it needs to buy companies. Since 2000, it has struck more than 140 acquisitions to keep the company on the leading edge of technology and to add thousands of talented engineers. At the same time, IBM also understands that it can be just as important to exit businesses. During the past decade, the company has pulled off about $15 billion in divestitures — perhaps the most important of which was the unloading of its PC segment.

Innovation: This is a huge advantage for IBM — it’s why the company has stuck around for more than 100 years. Every quarter, the company shells out a hefty $1.5 billion-plus in R&D expenditures, and the results have been strong. Last year, the company snagged nearly 6,500 patents, giving it the top spot for the 20th straight year.

Cons

Headwinds: As I noted in a recent post[2], the enterprise tech market has been undergoing a slowdown that has affected not only IBM, but other bellwethers like Oracle (ORCL[3]), SAP (SAP[4]), Accenture (ACN[5]), Intel (INTC[6]) and Qualcomm (QCOM[7]). Part of that has come amid pressure on emerging markets. If anything, they are seeing an outflow of capital as money goes back to the US, which has seen a pick-up in growth. At the same time, Europe has continued to languish, and many countries in the developed world are paring back their budget deficits. The result: a weaker environment for IT spending.

Disruptive Technologies: Over the years, the enterprise tech market has seen tremendous innovation, much of it coming from startup companies. As a testament to that innovation, there have been many standout IPOs, especially in the cloud space … and as more capital flows into the sector, these companies will likely get stronger and stronger. That’s a big problem for a company like IBM — despite its investments, a big part of its software is non-cloud, and other technologies, such as its databases, are still based on old approaches.

Hardware: Hardware still is an important part of IBM’s business, especially in terms of cash flows. The technologies focus on mainframes and power systems; however, competitive pressure has been growing over the years. Commodity-based servers are starting to take share away from IBM as these types of solutions become more common in datacenters. Not to mention that Oracle is also gunning for the market. While its efforts are still in the early stages, ORCL has the resources and strong distribution footprint to challenge IBM.

Verdict

IBM has hit a rough patch, but so have the other top tech companies. Looking at the long haul, IBM still is nicely positioned to benefit from various megatrends. Besides, it has continued to invest heavily to build a solid foundation, in terms of acquisitions and hiring.

Plus, its valuation remains reasonable at 10 times earnings, and IBM shares offer a little protection via a 2% dividend.

So should you buy IBM? Yes — for now, the pros outweigh the cons on the stock.

Tom Taulli runs the InvestorPlace blog IPO Playbook[8]. He is also the author of High-Profit IPO Strategies[9]All About Commodities[10] and All About Short Selling[11]. Follow him on Twitter at @ttaulli[12]. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. IBM: http://studio-5.financialcontent.com/investplace/quote?Symbol=IBM
  2. in a recent post: http://investorplace.com/2013/07/stay-away-from-enterprise-tech-stocks/
  3. ORCL: http://studio-5.financialcontent.com/investplace/quote?Symbol=ORCL
  4. SAP: http://studio-5.financialcontent.com/investplace/quote?Symbol=SAP
  5. ACN: http://studio-5.financialcontent.com/investplace/quote?Symbol=ACN
  6. INTC: http://studio-5.financialcontent.com/investplace/quote?Symbol=INTC
  7. QCOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=QCOM
  8. IPO Playbook: http://investorplace.com/ipo-playbook/
  9. High-Profit IPO Strategies: http://goo.gl/TXQsz
  10. All About Commodities: http://goo.gl/FfP8R
  11. All About Short Selling: http://goo.gl/t5Jzb
  12. @ttaulli: https://twitter.com/ttaulli

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