Even before the recent bear move in the markets, International Business Machines (NYSE:IBM) was already losing steam. But the fall-off in the markets has resulted in major losses for the year. Note that return on International Business Machines stock is an awful -24%.
Yet, this is really nothing new. Over the past five years, the performance has been lackluster. The average annual return on the IBM stock price is -5.7%.
As of now, the market value of IBM stock is under $100 billion. It’s as if Wall Street has thrown in the towel.
However, for value investors and contrarians, might there be an opportunity here? Has IBM stock finally hit levels where a buy makes sense? Well, I think so.
One of the main reasons is the proposed acquisition of Red Hat (NYSE:RHT) for $34 billion in cash. It’s actually the biggest deal in the company’s 107-year history. And it looks like an ideal fit for the strategic direction of IBM — that is, the hybrid cloud market. This involves mixing public and private clouds, which can be seamlessly shared. The setup provides for much more security and control. But there is also the ability to use the public cloud for data and app overflows.
Keep in mind that the hybrid cloud is something that larger companies prefer. It’s essentially getting the “best of both worlds” of cloud technology.
For IBM, this could also be a huge market opportunity. Note that enterprises are only about 10% to 20% into their cloud journey. But this should be accelerated with the hybrid cloud approach.
And with the Red Hat acquisition, IBM will become the No. 1 player in the market. Red Hat has amassed key technologies like middleware, virtualization, storage and containers. Although, the biggest advantage could be the company’s focus on open source development. This is where coders around the globe contribute to the technology, which helps to make it better and better. Companies also have the benefit of customization — and this is critical for complex IT environments.
Yet, it’s important to keep in mind that IBM has also put together its own set of powerful assets for the hybrid cloud, such as with AI (Artificial Intelligence), blockchain and security. The company already has about $19 billion of the hybrid cloud market.
Then there is the IBM Cloud Private, which launched a year ago. For the most part, it has gotten much traction. The new platform has attracted more than 400 global companies (many of these were competitive wins).
Bottom Line on IBM Stock
Over the years, IBM has fallen behind other tech operators like Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), Amazon.com (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) when it comes to the cloud space. But with the Red Hat acquisition, IBM should be able to make up for lost ground. More importantly, the deal is big enough to move the needle on the top-line.
In the meantime, IBM stock has one of the highest yields in the tech world, at 5.56%. And the company does have the resources to maintain the payout. Keep in mind that IBM continues to generate substantial free cash flows, which have come to $5.4 billion this year. The company will also suspend stock buybacks and may unload other businesses (one recent deal was a sell off legacy assets to India’s HCL).
And finally, the valuation on IBM stock is certainly at attractive levels. Consider that the forward price-to-earnings multiple is only about 8.
Now it’s true that finding the bottom on IBM stock has been a losing game. But, then again, in light of the very reasonable valuation, a juicy dividend yield and the potential catalyst from the Red Hat deal, the shares really do look like they are at a good entry point right now.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.