International Business Machines Corp. (IBM) stock is starting 2016 as one of big tech’s biggest losers — a familiar tune over the last couple of years.
This is a company that has seen more than $25 billion in annual revenue wiped off its income statement since 2011, an on-premise IT solutions provider that has suffered as IT services migrated to the cloud.
However, after years of turmoil and disappointment, it is now finally time to buy IBM stock.
Why 2016 Will Be Different
IBM just recently announced earnings for the fourth quarter, and the results were what IBM stock owners have come to expect. The company’s revenue declined 8.5%, with its two largest segments, Global Tech Services and Software, both seeing sizable drops. While IBM’s guidance for 2016 was considered “light,” that guidance represents something investors have not seen in quite some time — flat performance year-over-year.
IBM is expecting an EPS of $13.50, which would be about equivalent to its 2015 performance. Further, analysts now expect revenue of $77.7 billion, essentially flat year-over-year. What’s important to note is that IBM expects this performance despite delayed signings for large software deals and the expectations for even harsher Forex conditions as its hedges conclude.
Nevertheless, the fact that IBM’s revenue and EPS will be flat this year, or possibly higher, is great for the IBM stock price. It creates the potential for shareholder sentiment to rise, with investors finally seeing an end to the nightmare.
With IBM stock trading at 9 times earnings, there is no question it is cheap. And if the bleeding really has stopped, don’t be surprised if IBM stock jumps 20%, or more — and then, it will still be cheap.
IBM Gives Investors Something to Get Excited About
All things considered, it is one thing for IBM’s revenue and EPS to be flat year-over-year, but for the IBM stock price to really surge, investors need something to get excited about. Investors want to see some sign that there could be long-term growth and improvements at the company.
IBM is giving investors that catalyst with the Internet of Things, and the continued growth of cloud delivered as a service. In the latter, IBM is a force to be reckoned with, growing its revenue 50% to $4.5 billion in 2015.
That $4.5 billion in cloud delivered as a service is less than half of IBM’s total cloud revenue.
Overall, IBM has great prospects in the cloud.
But also, IBM formed a new business segment late last year called Internet of Things. This is where IBM will combine the resources of all its homegrown and acquired IoT businesses and partnerships. As previously explained, IBM is poised to dominate the data analytics segment of IoT, which could create billions of dollars annually for IBM, and potentially become one of its largest segments.
With IoT being a standalone segment, combined with the cloud’s continued growth, IBM stock owners have something to look forward to.
While the larger core IBM businesses like Global Tech Services and Global Business Services may continue to decline, the strength in those smaller, fast-growing segments should be enough to keep IBM’s revenue in-line with last year, and IBM stock higher.
As of this writing, Brian Nichols did not own stock in any of the aforementioned securities.
