Until a couple weeks ago, IBM (NYSE:IBM) stock was on a solid bull run. But with the plunge in the markets, IBM stock price got hit, going from $150 to $133.76.
Despite the recent decline, International Business Machines stock is still up a respectable 18% for the year. Keep in mind that – for the past five years – the return of IBM stock has averaged -3%!
Now the company certainly has its issues. Especially in the software sector, a large amount of IBM’s revenues still come from legacy technologies,. The result is that the company continues to be a laggard in the cloud business, compared to its competitors like Microsoft (NASDAQ:MSFT), Amazon.com (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG). Consequently, during the past four quarters, IBM’s top line fell.
Yet I still think IBM stock offers investors an opportunity now. IBM stock looks well-positioned to benefit from a major transformation of the company’s business.
The Red Hat Deal
IBM’s $34 billion acquisition of Red Hat is definitely risky. But I think the deal was worthwhile. Red Hat is a pioneer of the open-source software model, which has become a critical part of enterprise IT. This no-fee approach facilitates more ongoing innovation from an ecosystem of coders, as well as easier adoption.
Through the years, Red Hat has built a robust platform that helps companies manage hybrid environments, including traditional, on-premise software and cloud applications. As more companies seek to more fully exploit the digital transformation, this approach is becoming quite attractive. And the opportunity for IBM is still in the early stages. The company believes that a typical enterprise is only about 20% through the transition to the cloud.
IBM also brings key advantages. After all, the company offers significant opportunities for cross-selling into its massive customer base. It also has sophisticated global IT infrastructure.
The AI Power of IBM Stock
During the past five years or so, AI has become a fast-growing part of the tech world. This has been due to the convergence of factors like: the proliferation of big data, the innovation of deep learning models, the speed of GPUs (graphic processing units) and the growth of IoT (Internet-of-Things).
IBM has actually been in the AI game for decades. It was back in the 1980s that it created Deep Blue, which went on to beat the world champion of chess, Garry Kasparov. Then in 2014. IBM launched Watson, which beat the two all-time champions of Jeopardy!
Yet Watson definitely does much more than play games. The platform has become a powerhouse for AI, with more than 20,000 client engagements across 20 industries.
IBM’s consulting division also benefits from the increased popularity of AI. After all, there is often a need for extensive data integration, planning of AI models and deployment. An example of this is IBM’s engagement with ADP (NYSE:ADP), which worked with IBM to create a digital agent that handles as much as 20% of the company’s chat traffic.
The IBM Stock Price Is Cheap
Today it’s tough to find a low-valuation tech play, especially one in hot markets like cutting-edge AI. But IBM stock is – by any definition – a value opportunity right now. Consider that the forward price-earnings multiple of IBM stock is a mere ten.
And IBM has one of the highest dividend yields in tech: a juicy 4.84%. Note that it has raised its dividend for 24 consecutive years.
In the meantime, the company continues to crank out the cash flows to support the payout. During the past 12 months, it generated $16.1 billion of cash.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.