For the last five years, investors have been staying away from International Business Machines (NYSE:IBM) stock. With the proliferation of new technology stemming from the Internet of Things revolution, IBM seemed so … old.
This was a little strange, since the company has a long-standing commitment to open source development. Investors of a certain age may also remember Deep Blue, IBM’s chess-playing computer that was an initial foray into artificial intelligence.
Nevertheless, IBM has been struggling to compete in the new world of cloud computing. This is reflected in Big Blue’s revenue, and in the company’s stock price.
IBM Needed a New Business Model
Since 2011, the company has seen declining revenue as companies have been moving away from its mainframe computing solutions to an open-source, cloud-based architecture. IBM made aggressive moves to change their business model, but when you’re a company that’s been around as long as IBM, change does not happen overnight.
However, that may have all changed. In a “go big or go home” moment, IBM completed a $34 billion purchase of the hybrid cloud company RedHat. While some in the industry were skeptical of it, my colleague Luke Lango recently reiterated his belief that this acquisition can be the key moment in the company’s multi-year transition to the cloud.
Investors want to see positive growth in revenue and profit. The acquisition of RedHat gives IBM the ability to revenue growth and margins and should help the company to increase its profit.
RedHat Opens Up Other Avenues for Big Blue
But the acquisition of RedHat opens up other avenues for IBM as well.
At the recent Linux Foundation Open Source Summit, the company announced a deeper commitment to the open hardware movement. Specifically, IBM will be opening its Power Instruction Set Architecture (ISA). According to the press release, with this, “developers will have the tools to build innovative new hardware that takes advantage of Power’s enterprise-leading capabilities to process data-intensive workloads and create new software applications for AI and hybrid cloud built to take advantage of the hardware’s unique capabilities.”
A key tenet of information theory is found in Moore’s Law. Moore’s Law postulates that the speed, cost-effectiveness and capability of computers doubles every two years. This is due to the faster pace in the number of transistors. However, there is a growing feeling that Moore’s law may be coming to an end. And if it does, that will require companies to have solutions that go beyond central processing units (CPUs) for handling demand.
This is where IBM stock gets really exciting. IBM’s heterogeneous systems are designed to maximize the flow of data between a CPU and its attached devices. This could open up new avenues to improve performance in the compute-intensive workload like AI and in-memory analytics.
That would be welcome news for IBM stock. On Sept. 12, 2014, IBM stock was at its all-time high of $191.28. Since falling from that price, the stock has never been able to recover. On Feb. 24 2017, the stock came closest, with a closing price of $181.35. Today it trades at around $131 per share. Does this represent a reasonable entry point?
There’s Still a Lot to Like About IBM Stock
After five years of having a negative return, the stock is currently up around 18% year-to-date. However that number should climb when the company reports third-quarter revenues on Oct. 15.
Q3 will be the first accounting of the increased revenue from the RedHat acquisition.
And don’t forget, the company still pays a healthy dividend of 5%, so it’s a solid choice for value investors. The stock also has a trailing price-to-earnings ratio of 13.5 and a consensus price estimate of around $153 which would be an over 15% gain from the stock’s current level. This is increasingly looking like an interesting entry point.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
