Shares of blue chip technology giant International Business Machines (NYSE:IBM) have been on a roller coaster ride over the past 12 months. At the beginning of that stretch, IBM stock price dropped from $150 to $110 as investors questioned the legitimacy of the company’s proposed acquisition of hybrid cloud company Red Hat, and then rallied back to $150 as investors grew bullish on the Red Hat deal.
IBM stock price proceeded to drop back to $130 on trade concerns, rallied back to $150 as those trade concerns faded out, and then dropped back to $140 as trade concerns came back into the spotlight.
In other words, IBM stock has staged multiple double-digit-percentage rallies and declines over the past 12 months. Two double-digit rallies and three double-digit selloffs, to be exact.
Another double-digit rally is coming up. The acquisition of Red Hat will meaningfully improve all aspects of IBM’s core fundamentals. In a nutshell, Red Hat will enable IBM to once again generate sustainable revenue and profit growth. IBM hasn’t reported sustainable revenue and profit growth since the early 2010’s.
IBM closed the acquisition of Red Hat in July. Thus, Red Hat will be included in IBM’s results for the first time in Q3. That means this quarter will be the beginning of a new era of sustainable revenue and profit growth for IBM.
Investors will want to buy IBM stock ahead of the game-changing Q3 earnings report. At the same time, trade tensions over the next few months should cool down, and market conditions should improve.
Overall, then, IBM stock looks due for yet another double-digit rally over the next few weeks and months. Consequently, buyers on this dip should be rewarded in the not-too-distant future.
The Red Hat Acquisition Is a Game-Changer
I’ve been pounding on the table ever since the Red Hat acquisition was announced, saying that the deal will be a game-changer for IBM.
IBM has been plagued by sluggish revenue trends for the past several years. Specifically, the company’s revenues have actually been retreating ever since 2011, as its product portfolio has become increasingly antiquated and irrelevant.
In order to fix this issue, IBM has aggressively attempted to pivot into the cloud. It’s done so with varying degrees of success. At first, its cloud growth rates were huge. But they’ve since slowed, and sluggish and generally uninspiring cloud growth haven’t been enough to offset IBM’s non-cyclical revenue decline.
IBM just closed its acquisition of hybrid cloud company Red Hat. Red Hat is a major hybrid cloud player which dominates the all-important open-source software component of the cloud.
Red Hat is also a double-digit-percentage revenue grower with 85%-plus gross margins and 20%-plus operating margins. IBM, by contrast, is a negative revenue growth company with 50% gross margins and sub-20% pre-tax margins.
Thus, the integration of Red Hat into the IBM ecosystem will do three things: 1) it will turn IBM into a consistent low to mid-single- digit revenue grower, 2) it will expand IBM’s margins, and 3) it will drive steady and consistent profit growth over the next few years.
Thus, the acquisition of Red Hat promises to usher in a new era of growth for IBM, which it hasn’t had since 2010. Investors will want exposure to IBM stock ahead of this huge growth surge. As a result, it seems likely that IBM stock will rally over the next few weeks and months.
Stock Market Conditions Will Improve
My bull thesis on IBM stock could be torn apart if the market decides to stay in sell-off mode. Specifically, IBM stock price will fail to rally if trade tensions stick around.
But trade tensions won’t remain. What we’ve seen recently is just another trade war “flare-up.” We have had such “flare-ups” before, such as in late 2018 and in April 2019. All of these “flare-ups” last for a few weeks, then simmer down, and everything is quiet on the trade front for a few weeks. Then, bad news is replaced with good news, and stocks recover.
That’s why this chart – however comical – is actually a very true representation of the trade war. The U.S.-China trade war follows a rather predictable cycle, and, based on that cycle, we are due for some good news within the next few weeks and months.
If that is the case, stocks will rebound from this selloff. That stock market rally will help support my bull thesis on IBM stock.
The Bottom Line on International Business Machines Stock
For almost a decade, IBM’s revenue, margins and profits have been dropping. That’s all about to change, thanks to the Red Hat acquisition. Revenue growth, margin expansion, and profit growth will all come back into the picture for IBM.
Investors will want exposure to IBM stock ahead of this monumental growth turning point, which will materialize for the first time in the company’s Q3 results. Consequently, as long as stock market conditions remain favorable – and they should – then IBM stock price will likely rebound from its most recent selloff. International Business Machines stock looks well-position to rise above $150 within the next few weeks.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.