International Business Machines Corp. (IBM) has lost some of its luster over the last five years as the company’s dominance in PC hardware became less and less valuable with the advent of cloud computing and mobile browsing.
IBM stock has declined just over 7.5% over the last 12 months, and Big Blue could be in for another drop with its upcoming earnings release on Monday.
However, that doesn’t mean it’s a dud. In fact, buying IBM stock now could prove to be a very lucrative long-term play.
IBM is set to release its first-quarter earnings on Monday, April 18, and most believe that the figures will disappoint. The firm is expected to announce earnings per share of $2.08 a share and revenue of $77.9 billion, though many analysts are anticipating even worse results.
IBM has been suffering from currency pressures and the company’s efforts to shift its business model from hardware to software, artificial intelligence and cloud computing have weighed on profits. However, while this year’s financials may not paint a rosy picture, the company is a good bet for the future and buying in now, or soon after disappointing first quarter results, could be a good entry point.
What’s to Come for IBM Stock
IBM stock is poised for a comeback over the next few years as the company has revamped its strategy and will likely become a leader in up-and-coming industries like artificial intelligence, big data and cloud computing.
Its Watson computer has already been hailed as a huge advancement for the healthcare industry, as it is able to sort through reams of data to help medical professionals identify patterns and make better decisions regarding treatment plans.
Earlier this year, the company also announced plans to acquire Bluewolf Group, a consulting firm that helps businesses transition to the cloud. The purchase reinforces IBM’s plans to shift its attention away from hardware and deliver value to customers by helping them transition from physical servers to cloud computing.
IBM’s financials show that its comeback is imminent as well.
Big Blue has classed cloud computing, cybersecurity, Big Data and artificial intelligence as strategic imperatives and those businesses now make up 35% percent of IBM’s revenue. As resources are reallocated away from the firm’s core business, overall revenue is likely to continue declining, but a bit of patience from investors is likely to yield impressive gains in the future as the company continues to reinvent itself and change with the times.
For traders considering an IBM investment, the question is “When” rather than “If”. Most analysts agree that the firm will eventually turn things around, but whether that will be this year is up for debate.
While analysts from Credit Suisse and S&P Capital IQ don’t see the firm turning around over the next year, others like Stifel are more optimistic. Credit Suisse gave IBM a $110 price target, but Stifel was much more optimistic, raising its target price to $165, while restating its buy rating.
Monday’s earnings report could send prices higher or lower depending on whether they disappoint, but regardless IBM stock is likely to rise higher than its current $151 per share price tag in the long-term.
Why Wait?
For long-term investors, that makes IBM a buy, as its future potential is sweetened by dividend payouts that make waiting for a turnaround even more worthwhile. The company boasts a 3.5% dividend yield and its track record of boosting that figure is impressive. Not only has the firm paid dividends every year for the past 100 years, but IBM has consistently raised its dividend since 1996.
Another concern for investors considering IBM stock is whether the current price is too expensive. The answer to that depends on how long they are planning to hold on to the shares.
While it’s possible that IBM stock will decline further in the coming days following its earnings release, waiting until after the release is a gamble. It’s possible that IBM’s Q1 results will beat expectations, which would jack up prices.
But, for those who plan to hold on to the stock over the next few years as the firm transitions, $150 per share could be considered a bargain.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
