International Business Machines Corp. (NYSE:IBM) could be one of the biggest beneficiaries of Bitcoin, especially when confusion reigns on the cryptocurrency. The rise of bitcoin is no surprise to any investor who’s opened a newspaper this year. But there’s a stunning lack of understanding surrounding bitcoin, what it’s built on and how that architecture impacts companies like IBM.
First, did you know that Americans aren’t even sure about bitcoin’s legality? “Close to 11% think” it’s illegal, while another 48% aren’t sure if it’s legal or not. That right there holds back the cryptocurrency and shows just how uneducated the public is about it. That’s not necessarily a knock against the American public. But imagine how much Tesla Inc (NASDAQ:TSLA) or Apple Inc (NASDAQ:AAPL) stocks would struggle if half the country wasn’t sure whether it was illegal to own them.
That means even less people know about what bitcoin is built on, that being blockchain.
What Is Blockchain?
Originally, blockchain was built for cryptocurrencies like bitcoin to exist. But since then, users have found other meaningful ways to use the platform. In some eyes, “blockchain technology created the backbone of a new type of internet.” A rather bold statement, for sure. But it highlights just how important it can be.
Bitcoin isn’t blockchain’s only application; nor are cryptocurrencies. In fact, it allows for safe, secure transactions and transfers of all different sorts. So while JPMorgan Chase & Co. (NYSE:JPM) CEO Jamie Dimon may be busy slamming bitcoin as a fraud, his firm is surely working on ways to embrace blockchain.
It’s not just JPM. All banks, be it Bank of America Corp (NYSE:BAC), Wells Fargo & Co (NYSE:WFC) or Goldman Sachs Group Inc (NYSE:GS), stand to benefit. Blockchain is safer, faster and more secure. Why wouldn’t we embrace it?
I strongly suggest reading this article, right here. It’s not that long, but it has plenty of insightful information. Some like this:
“The Internet is great for collaboration and information exchange but when it comes to transactions and commerce it has some deep flaws…As such [blockchain] holds the potential for unleashing countless new applications…and has yet unrealized capabilities that have the potential to transform everything in the next 25 years.”
“[The blockchain] is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value and importance to humankind…We will not need to trust each other in the traditional sense, because the new platform ensures integrity.”
In a way, we’re looking at an internet rebirth. An emerging technology that, like artificial intelligence, we’re not completely sure about its potential or endgame. And that’s okay. But if an investor believes in its potential, it all comes down to one question: How can I get involved?
Enter, International Business Machines
IBM has not made headlines for the right reasons this year. Revenue has decreased on a year-over-year basis for 21 consecutive quarters. Famed investor Warren Buffett, who runs Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B), has slashed his stake from 81 million shares to 54 million shares in the first two quarters of 2017.
Ginni Rometty became the president and CEO of IBM in January 2012 and has touted a need for constant reinvention in order for tech companies to be successful. It makes you wonder then, what she’s been doing for the last five and half years and if it will ever pay off for investors.
If you’ve tuned into any of the company’s most recent comments, management is beginning to mention blockchain more. Last quarter, they mentioned applications in the cloud and working with seven banks in Europe to launch the technology. According to a report published by IBM about a year ago, IBM said, “15% of banks worldwide expect to widely implement blockchain.” That’s according to the 200 banks surveyed. By 2020, roughly two-thirds of them “expect to have blockchain in commercial production and at scale.”
In November 2016, Tom Rosamilia, the senior vice president of IBM Systems, spoke about various blockchain applications from IBM’s perspective. He spoke of mobile transactions in the $30 billion-per-day range. He mentioned Wal-Mart Stores Inc (NYSE:WMT) and its food supply chain in China, minimizing contamination and pinpointing exactly where contaminated strands came from. Perhaps they should call Chipotle Mexican Group, Inc. (NYSE:CMG). He also talks about logistics operations being improved as well.
“All of those things can be expedited, and we can take that inefficiency out of the system with blockchain,” he explained during a global technology conference hosted by UBS.
What’s the Worry, Watson?
My one concern would be IBM’s execution. IBM has been touting Watson as a world-changing supercomputer. While it may be powerful and capable, we’ve yet to see it turn around IBM’s woes. My fear is that IBM has a chance to leverage Watson and blockchain (blockchain applications, artificial learning, the cloud and machine learning) but will ultimately drop the ball with both assets.
Trading IBM Stock
I don’t think blockchain (or Watson for that matter) makes IBM a screaming buy right here, right now. It will be years before blockchain makes a notable impact, if it does at all. But from a risk/reward standpoint, IBM stock may be worth some attention.
For all its flaws, valuation is not one of them. IBM stock trades at just 12 times trailing earnings and 10 times forward earnings expectations. On a trailing basis, IBM stock usually trades with a price-to-earnings ratio between 11.5 and 15.5. So it’s near the bottom of that range. It also pays a 4.1% dividend yield.
We used a five-year weekly chart. Support sits between $130 and $140, so on a pullback, IBM may be a tasty one to gobble up. On one occurrence, shares did break below support and tumble down to about $115. If support holds though, IBM may be a low risk/high reward setup for blockchain and other applications of the future.