Shares of International Business Machines Corp. (IBM) are faring pretty well so far this year, all things considered. Since 2016 kicked off, IBM stock has chugged over 10% higher. Meanwhile, the S&P 500’s rise is sitting shy of 3%.
When I say “all things considered,” one thing I’m referring to is the fact that outperformance of any kind hasn’t been in the cards for IBM stock for some time.
Over the last five years, for example, IBM stock has shed over 10% of its value while the broader market has expanded its worth by over 56%.
I’ve nodded to this before, saying that the IT sector is often one of the first mentioned with regards to growth, but that in many ways has actually become a more mature industry in recent years. The value of worldwide IT spending dropped 6% from 2014 to 2015, and was slated to grow by 0.6% this year, suggesting corporations are not opening their technology purse strings as they remain cautious about expenditures given the low economic growth.
The low growth rate, coupled with a slow attempt at a transformation from IBM, has translated to years of of revenue declines, which has translated to the aforementioned stock decline.
Bright Side for IBM Stock?
But even though low growth overall in the IT sector could very well continue into the future, pessimism around IBM stock seems to have peaked earlier this year, raising the question of how sustainable this small-scale recovery is compared to the broader downtrend.
To start, let’s consider the company’s most recent earnings report — a blip in IBM stock’s recovery. The bad news: IBM posted its 16th straight revenue decline and its worst revenue figure in 14 years. The good news: That was expected, and IBM was still able to beat Wall Street’s estimates on the bottom line.
A little more good news: IBM also enjoyed double-digit growth in its cloud computing division, which is the division largely driving the company’s aforementioned transformation (a tech narrative we’ve all heard before).
A little more bad news: Despite that progress regarding IBM’s transformation, analysts and experts alike have noted just how far the company has to go … and I agree with them.
Despite this year’s recovery, the tough reality is that substantial growth still isn’t on tap. Earnings for the current quarter are supposed to fall 25% year-over-year — far worse than the broader industry’s 20% average decline — while more revenue declines are slated for 2016 and 2017.
Despite the lack of real growth, IBM stock has still been growing, with the 10% leaving shares right around the company’s median price target.
That makes me worried, since there isn’t much in the pipeline to justify upward momentum or propel more of it. Sure, some have cited artificial intelligence as the big driver for IBM stock, but it’s a gamble more than a guarantee … and a gamble also being pursued by companies that are far more nimble and expanding far more rapidly than the old-school Big Blue.
Besides, with an established blue-chip company boasting a dividend yield just shy of 4%, the investment thesis should be slow-and-steady growth and an established business model… not a bet on emerging technology.
With that in mind, IBM doesn’t offer the best of both worlds, but the worst. Its established operations are shrinking and weighing the company down, which also will weigh on its attempts at innovation and agility. The dividend might suggest a safety net, but it’s not surrounded by fundamentals or a story that’s appealing. There are other true growth options out there, and other dividend options out there as well if you really just want the yield. But IBM stock, with both wrapped into one, isn’t s a game-changer or a good bet at this stage.
There is a lack of evidence that the recent “recovery” is more than a blip — and that recovery is small potatoes to the general downtrend anyway.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
