Blockchain Can Push International Business Machines Corp. Stock Higher

IBM stock - Blockchain Can Push International Business Machines Corp. Stock Higher

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In a market where value looks increasingly difficult to find, International Business Machines Corp. (NYSE:IBM) looks intriguing. IBM stock looks cheap though years of stagnant (at best) performance help explain the below-market valuation.

Looking forward, I continue to see reasons for optimism toward IBM. The business has stabilized of late, with a Q3 beat raising hopes of finally ending a 22-quarter streak of declining revenue. IBM stock trades at just 11x forward EPS estimates, meaning flat results should be good enough for some upside.

And there’s an interesting potential driver for IBM in the form of blockchain adoption. The technology behind the popular bitcoin (and other so-called “cryptocurrencies”) has real-world applications well beyond cryptocurrency. IBM is starting to look like a potential leader, and winner, in that space.

Bret Kenwell pointed out last month that IBM stock hadn’t benefited from the same blockchain mania that’s led stocks like Riot Blockchain Inc (NASDAQ:RIOT) and Longfin Corp (NASDAQ:LFIN) to soar. And that makes some sense: blockchain remains a tiny part of IBM’s business and the gains in RIOT and LFIN (to mention cryptocurrencies) look more than a bit ‘bubbly’.

Still, there’s an opportunity here. The bull case for IBM rests on the company crafting a turnaround like those seen at Microsoft Corporation (NASDAQ:MSFT) and Intel Corporation (NASDAQ:INTC).

In both cases, a company seemingly behind the curve managed to reassert its place in the tech ecosystem. Blockchain alone won’t solve IBM’s problems, but it could be a step in the right direction.

IBM’s Blockchain Efforts

Blockchain goes well beyond cryptocurrency. And IBM is “going all in” as Bloomberg put it in an article last week. IBM has helped code an open-source blockchain program, and already is using the technology in-house in its own financing unit, as UBS analysts pointed out back in September.

So IBM’s efforts aren’t about bitcoin, Ethereum, or the other cryptocurrencies that garner most of the blockchain news coverage. Rather, the distributed ledgers created by blockchain can be used to “remove the middleman” in industries ranging from transportation to streaming music.

IBM’s Q3 conference call highlighted efforts to improve food safety, with Wal-Mart Stores Inc (NYSE:WMT) on board and a blockchain-based platform for global banks.

Is the market opportunity big enough? Not yet. The food safety effort, for instance, is reminiscent of the business model at Park City Group, Inc. (NASDAQ:PCYG), whose ~$175 million enterprise value is barely 1% of IBM’s.

The banking opportunity is being targeted by many players, with hopes of improving back-office processes and cross-border payments, among many other applications. And there’s still the problem that IBM’s legacy business remains in decline. As noted, revenue has declined for over five consecutive years.

But it’s a start. And combined with AI efforts with Watson and even quantum computing, the blockchain offering at the least is a sign that IBM might be getting back to its innovative ways. Meanwhile, even with IBM stock up 14% from August lows, little in the way of growth is priced in.

IBM Stock Is Cheap

IBM is valued as if it were a declining business. Forward P/E is roughly 11x, and the dividend yield still sits near 4%.

But there are some signs of life here. The mainframe cycle has turned back in the company’s favor. Revenue declines have narrowed. The Street sees basically flat sales next year and modest EPS growth in both 2017 and 2018.

IBM isn’t going to be a torrid grower, and blockchain alone isn’t going to drive 30% or 40% upside in IBM stock. But the status quo already looks reasonably priced in. And so the argument for IBM stock at these levels is that the downside seems reasonably limited.

The dividend yield should provide some support at $150, though that’s hardly always the case (just look at General Electric Company (NYSE:GE)). Some level of weakness is priced in going forward.

And yet with efforts like those in blockchain, IBM has a chance to return to a growth trajectory on both the top and bottom lines. That chance isn’t priced in. So IBM stock seems to offer, in a bearish scenario, middling share price appreciation but at least a nearly 4% dividend.

And in a bullish outcome, where it reasserts itself as a tech leader, big upside is possible. Getting back to EPS growth would lead earnings multiples to expand; it’s not at all impossible to see IBM stock clearing $200 in that outcome. (Think 14x $15 in 2018 EPS, still just ~9% growth.)

There are risks here, and IBM isn’t alone by any measure in trying to monetize blockchain. But for the first time in a long time, it has a head start in a key technology. And that alone could help IBM stock post a strong 2018.

As of this writing, Vince Martin has no positions in any securities mentioned.

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