When it comes to technology stocks, it’s difficult to determine whether or not a particular company has long-term potential, as the industry is constantly changing. There are very few exceptions to this rule, but International Business Machines Corp. (IBM) is one of them.
IBM Stock Is Undervalued
IBM stock fell out of favor with investors a few years ago when its core business — desktop computers — began to fade in popularity.
While the stock has gained nearly 17% so far this year, at $162 per share IBM is still far from the more than $200 share price it boasted back in 2013. That means it isn’t a bargain basement buy, but with a price-to-earnings ratio of just 13.1, IBM stock is certainly undervalued.
Investors’ worries about IBM are not unfounded; the company’s most recent earnings reports have shown that the firm’s revenue is consistently declining as its profits shrink.
However, Big Blue’s bottom line doesn’t tell the whole story. Yes, it’s true that IBM isn’t the profit-machine it once was, but the company does present a compelling growth story.
Transformation of IBM Stock
IBM has been working on transforming itself into a cloud computing and artificial intelligence firm, so many of its resources have been diverted to grow its new businesses, dubbed “strategic imperatives” on its balance sheet.
This part of IBM’s business makes up only 38 percent of its overall revenue, but it’s an important figure to consider as it represents the company’s future.
In the second quarter, IBM’s strategic imperatives generated $8.3 billion worth of revenue, a 12 percent increase from the previous year. Even more impressive was IBM’s cloud revenue, which brought in $11.6 billion.
Another reason to consider IBM as a long-term growth play is the company’s supercomputer, Watson.
The computer uses machine learning and artificial intelligence to sort through reams of data and make educated decisions, and it is expected to do big things in the coming years. Watson has the potential to revolutionize the healthcare space by assisting doctors in assessing medical conditions and coming up with effective treatment plans.
IBM is planning to introduce Watson to 21 Chinese hospitals, where it will be used by doctors to deliver more efficient healthcare, specifically when it comes to fighting cancer.
Not only does the fact that Chinese hospitals are going to rely on Watson give IBM some major clout in the medical community, but the computer will actually be improving its capabilities as it is being used.
Machine learning means that computers are able to draw on past experiences in order to make better decisions, so being used in a country of over 1.4 billion people is a big step forward for the technology.
How Long Until an Upside?
IBM’s transformation from a traditional computer company to a cloud solutions and artificial intelligence firm will certainly take time, and investors can expect to see a few more quarters of lackluster results before things start to improve. However, it’s not all doom and gloom for those owning IBM stock.
The firm’s share price saw a 22% lift over the past 6 months and the company’s dividend yield of 3.5% makes the wait much easier to cope with.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.