Legacy computer technology giant and emerging cloud powerhouse International Business Machines (NYSE:IBM) has never really been an exciting investment. Lately, though, shares of “Big Blue” have taken their boring image to a new level. Since getting off to a great start early this year, the IBM stock price has traded sideways.
Sure, a few spikes have occurred in market value. But for the most part, International Business Machines stock has been muted despite rumblings in the broader cloud space. For instance, Microsoft (NASDAQ:MSFT) flexed its muscles big time when it won a lucrative cloud-based defense contract over Amazon (NASDAQ:AMZN).
Subsequently, Microsoft has dazzled stakeholders while Amazon has uncharacteristically disappointed. And in the midst of this noise, the IBM stock price just chugs along, enticing neither bulls nor bears.
Aside from the frustrating consolidation, I can’t help but notice another peculiarity of International Business Machines stock. From the May lows of this year to the August highs, the vertical range of the IBM stock price has whittled down.
Year-to-Date Stock Price Chart
Source: Chart by Josh Enomoto
According to commonly accepted interpretations, technical analysts would likely regard this pattern as a pennant formation. Typically considered a continuation pattern, traders on opposite ends of the aisle are locked in tough negotiation. At some point, according to the technical discipline, a capitulation will occur.
From my perspective, I don’t question the probability of such an event. Rather, I’m curious — as you all are — as to the breakout’s direction. For many, many years, the IBM stock price has disappointed stakeholders who’ve waited for a recovery that never came.
It’s an overused expression, so forgive me. But will this time be different for International Business Machines?
Brewing Fundamental Enthusiasm for IBM Stock
While lamenting the frustration behind the stagnant IBM stock price, critics argue that it’s more than justified. Specifically, they have questioned the rationale behind Big Blue’s acquisition of open-source, enterprise-level software developer Red Hat.
At a price tag of $34 billion, this is IBM’s biggest deal. Furthermore, it’s among the most expensive acquisitions in the American tech sector. Aside from the failed AOL-Time Warner merger, the Red Hat deal is only second to the Dell-EMC merger ($67 billion) and JDS Uniphase acquisition of SDL ($41 billion).
Ordinarily, a mega-deal wouldn’t detract from an organization. After all, you need to pay to play in tech. That said, we’re not talking about Amazon or Microsoft. Instead, we’re discussing IBM stock, which hasn’t earned shareholder confidence since the early days of smart devices.
For one thing, IBM’s annual revenue trajectory has mostly been declining since 2011. Since that time, Big Blue has unsurprisingly racked up debt in a bid to stay relevant. And the Red Hat deal spiked debt to over $58 billion.
Nevertheless, I’m confident that the IBM stock price can wage a realistic recovery campaign. The Red Hat deal, while expensive, gives International Business Machines an opportunity to compete effectively in cloud computing’s second wave.
This second wave involves enterprise-level solutions, specifically Kubernetes-based applications. Here, Red Hat offers unparalleled practicality and scalability. With the Kubernetes protocol, IBM is able to offer network compatibility via self-contained applications. A great example of this concept is Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Gmail, which doesn’t require extensive user-level hardware or software applications to run.
IBM wants to bring this compatibility and seamless integration to the enterprise. With Red Hat, it can. Subsequently, Alphabet — which invented Kubernetes — and IBM are this cloud platform’s leading developers.
An Intriguing Technical Setup
Source: Chart by Josh Enomoto
Granted, International Business Machines stock has had many years to prove itself. Therefore, I understand investors’ hesitation. Basically, Big Blue has cried wolf too many times.
However, I believe the company’s Kubernetes-based initiatives have serious legs to run. Although Amazon and Microsoft currently own the top slots in cloud market share, this is not guaranteed to last. They may have dominated the initial phase of the cloud. But moving into the second, enterprise-specific phase, IBM offers an interesting alternative.
Moreover, the technical charts appear to confirm this narrative. Since the Great Recession lows, the IBM stock price has printed a longer-term pennant formation. Thus, what we saw this year is a pennant within a much larger pennant. This suggests again that we’ll see a big move in the near future.
Ultimately, I think the current consolidation will resolve to the upside. In recent years, IBM has quietly bolstered its cloud position to advantage the industry’s next big development. With Red Hat and Kubernetes, the company has a chance to convert fantasy into reality.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
