After ending its run towards the $1 trillion mark in market capitalization, Apple Inc. (NASDAQ:AAPL) could stall for a while. The iPhone 8 and iPhone X are arguably successful releases, but investors will not see the higher sales until two or three quarters from now. Conversely, International Business Machines Corp. (NYSE:IBM) stock is hovering about 5 percent above its 52-week low, compared to Apple which is down 5 percent from yearly highs (and up 49% from yearly lows).

The value investor should consider switching AAPL stock for that of IBM shares.

IBM Stock Valuation

IBM stock trades at a price-earnings ratio of 12 and a forward P/E ratio of 10.6, compared to 17.7  and 14.1, respectively, for Apple. Investors cannot ignore the discount in IBM compared to Apple’s premium.

Apple’s higher valuation is easily justifiable: it has a history of refreshing iPhones and then benefiting from single-digit sales growth in the quarters that follow. Add software services revenue and Apple quickly looks like a very inexpensive software stock.

But after a year of under-performance, IBM’s move toward faster-growing software segments may finally pay off. Income investors will like IBM’s dividend of 4.1 percent, compared to around 1.6 percent for AAPL stock.

IBM is trying to pivot its business towards higher-margin businesses. Its Watson product targets the financial services and pharmaceutical industry, with success. In India, 1,000 firms signed up for IBM’s Watson IoT platform.

On Oct. 4, IBM partnered up with major banks to develop a blockchain trade finance system. This differs from bitcoin in that it has nothing to do with cryptocurrencies. The application records transactions only. If successful, it would replace both EDIFACT (Electronic Data Interchange for Administration, Commerce and Transport) and wire transfers of funds.

According to Juniper Research, IBM will lead the blockchain industry and will outrank Microsoft Corporation (NASDAQ:MSFT). IBM’s revenue will benefit if it becomes the company that develops a specific architecture for blockchain to meet specific functionality. Once deployed to its existing cloud, IBM will start collecting revenue as customers use it like a cloud service.

Before investors get too excited, though, it’s also worth noting that the profit margin in blockchain is likely to be very low. So, even if IBM leads the blockchain market, it may have little impact on its overall business.

In August, IBM’s The Weather Company said it would integrate live global flight tracking data from FlightAware. In effect, the unit is making use of its network of the IoT and tying it together with deep learning solutions. As the integration develops, the unit could even make better weather predictions, along with supplying valuable predictive data to insurance companies.

Based on 10 Finbox.io financial models, IBM stock is undervalued by at least 3 percent:

 

 

 

Source: finbox.io

 

 

 

 

 

Upcoming Earnings Report

When IBM reports quarterly earnings on Oct. 17, investors will look for a number of key metrics. IBM will need to report better cash flow, which totaled over $2.5 billion. In the last quarter, the company announced the new IBM Z system would be available. Any announcement of contract wins should give investors some confidence that IBM will deliver at least $13.80 in operating earnings this year. This is consistent with last year’s performance.

Acquisitions IBM made last year should give revenue a lift. Expenses should not change much, since IBM hired 20,000 staff in the first half of the year. That staff increase should lead to an increase in revenue, ignoring any currency fluctuations.

In the software space, IBM’s Watson Health should be a bright spot, just as it was last quarter. In Q2, the unit benefited from more customer activity from the local and state government agencies. Hospital customers, particularly those in oncology, scaled the Watson solution, giving the unit a lift.

Bottom Line on IBM Stock

IBM’s stock appears to have bottomed in August.

A strong earnings report will justify the rally, but, at its current valuation, IBM is an attractive investment for value investors.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.