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Buy This Dip in IBM Stock

IBM stock has faded, but upcoming earnings could be a catalyst

IBM (NYSE:IBM) continues to disappoint. The long-term trend is negative: IBM stock has declined over 40% from 2013 highs. And it’s not just a stock price problem.

The IBM 5160 is a version of the IBM PC with a built-in hard drive. Released on March 8, 1983. The 5100 series are knowns as one of the first home computers.
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IBM’s business hasn’t performed all that well, either. The company infamously went 22 consecutive quarters without a year-over-year sales increase before ending the streak in 2017. Less than a year later, growth again turned negative.

The rise of the cloud has pressured IBM’s hardware business. Amazon (NASDAQ:AMZN) has seen its stock zoom past $3,000 thanks to its leadership in the cloud. IBM seemingly has been left behind.

The dismal sentiment toward IBM stock thus has some basis, but with the stock threatening a three-month low and down almost 11% year-to-date, I think that sentiment is a bit too dismal.

After all, IBM itself has a growing cloud business. Last year’s acquisition of Red Hat positioned the company for growth in the space. A new chief executive officer can drive change. And IBM stock at this point is flat cheap.

There’s a better story here than most investors seem to realize. The second quarter earnings report this month may well make that clear.

IBM Stock Gets Left Out

It doesn’t take a detailed look at the market to see that cloud is hot. Amazon stock has soared. Microsoft (NASDAQ:MSFT), almost quietly, has rallied 36% so far this year. It’s added over $400 billion in market value in the process.

So-called ‘SaaS’ (software-as-a-service) names are flying high, whether it’s cybersecurity play Okta (NASDAQ:OKTA) or old hand Salesforce.com (NYSE:CRM).

The optimism makes some sense. The coronavirus pandemic is accelerating cloud adoption and increasing cloud demand. Yet none of that optimism has made its way to IBM stock. Again, the stock is down 11% so far this year, while the tech-heavy NASDAQ Composite is up 20%.

The near-term case for IBM is that the stock can close that gap. And earnings can help.

How Earnings Can Help

After all, the narrative surrounding IBM and the cloud isn’t quite accurate. Certainly, cloud growth has hurt sales in legacy categories like mainframes. But IBM itself is a reasonably large player in cloud.

In fact, as I detailed earlier this year, IBM is one of the leaders in hybrid cloud, thanks to the Red Hat acquisition. Hybrid cloud developments may get an added boost from remote work and other trends that are going to emerge from the current crisis.

I’d expect that second quarter earnings, tentatively scheduled for July 20, will remind investors of that fact. After all, I thought the Q1 release in April supported the bull case. Investors briefly agreed: IBM stock rallied through June.

In Q1, cloud revenue increased 23%. That was with a hit to sales late in the quarter as the coronavirus shuttered offices. Second quarter results may well be better.

If IBM can show strong cloud growth in Q2, as I expect it will, its stock can bounce much like it did after the Q1 report.

Tempered Expectations

To be sure, IBM isn’t going to track down Microsoft or Amazon in the cloud game. Those two companies have a huge head start.

But for IBM stock to rally, IBM doesn’t need to be first or second in the category. I’m not even sure it has to pass Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) for third.

After all, Amazon and Microsoft combined are worth over $3 trillion. IBM has a market capitalization just over $100 billion.

Meanwhile, the stock trades at less than 10x forward earnings. A dividend yield of 5.4% adds a “get paid to wait” aspect to the turnaround case.

That earnings multiple and that dividend yield show how muted expectations truly are. And it sets IBM stock up well for the earnings report. Bad news to at least some extent is priced in. Any good news is not.

There should be some good news, at least in the cloud business. And a look around the market shows what can happen to a stock when investors start pricing in cloud growth. Put simply, I think the bottom is in for IBM stock.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/buy-this-dip-ibm-stock/.

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