Wow, it’s been a messy and painful ride in tech stocks lately. Specifically, growth stocks have really struggled. But you know what company’s stock has been doing pretty well? International Business Machines (NYSE:IBM). IBM stock is actually up 1% in the past month, while the Nasdaq is down over 6%.
Admittedly, the year-to-date performance is about the same for both — with IBM down less than 1% and the Nasdaq up about 2% — but there’s a different mix to the recent selling.
Pandemic-related stocks that did well during the novel coronavirus are out of favor. That includes certain retailers, stay-at-home plays and many tech stocks. On the upswing are casinos, cruise stocks and reopening plays.
IBM stock doesn’t really fit into either category. It was a major beneficiary due to Covid-19, and it didn’t see business fall off a cliff like airlines. That makes IBM potentially attractive here, as the stock has been stable amid the recent dip.
Sizing Up IBM Stock
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While IBM stock has been holding up pretty well, notice the lack of upside participation over the past year. Shares cratered hard in March 2020 like most names, only, instead of a robust rebound, it’s been stagnant.
Obviously, that’s not a huge selling point. However, there are some silver linings to the technical side.
First, unlike growth stocks that have had a torrid run, IBM stock doesn’t have enormous gains sitting there as risk. Second, because it fell so hard and has yet to recover those losses, one could argue that it’s set to at least recover those losses from a year ago.
If it were to do that, IBM stock would have about 30% upside from current levels.
The timing of IBM’s downfall couldn’t have been worse. After years of horrible price action, the stock was finally seeing some momentum. On the chart, one can see how sharp of a rally it was enjoying in early 2020.
The good times were cut short due to the coronavirus sell-off, and ever since, IBM has spent most of its time chopping between its 61.8% and 38.2% retracements, as well as its key long-term moving averages.
For IBM stock to regain momentum, it needs to reclaim these levels and get the technicals on its side. In the meantime, management is working on the fundamental equation.
IBM Is Working the Turnaround
Growth has been the main issue with IBM. Years ago, the company thought it could simply utilize its free cash flow (FCF) to gobble up its own stock via share repurchases. The argument was that this would inflate earnings per share (it does) and continue to make IBM attractive for years to come.
Heck, it even had Warren Buffett on board.
But that’s not how tech investments work. Or at least, not completely. While everyone loves a good buyback when there’s too much cash to wisely deploy in other assets, companies need more than that. Investors want real growth in sales and earnings, not just artificially inflated bottom-line results.
It encourages stagnancy, allowing competition to come in and eat a company’s lunch. That’s exactly what we saw, with revenue declining for 22 consecutive quarters at IBM. That’s more than five years!
But that’s in the past as IBM looks to turn the ship.
Consensus estimates call for about 0.8% revenue growth this year and 1.3% growth next year. A far cry from robust growth, sure, but better than negative growth? You bet.
Earnings are forecast to grow a much more impressive 27% this year and almost 10% in 2022. Should the company deliver, investors are paying about 11 times this year’s earnings for potentially back-to-back years of double-digit earnings growth.
What will really get the stock going is a multi-year growth plan. If IBM can deliver the idea — either literally or through context — that it can accelerate its revenue growth while maintaining solid earnings growth, this name could have some solid upside. At least to its 2020 highs anyway.
Its acquisition of Red Hat was a step in the right direction, but IBM will need more than that to get momentum in its favor. It’s on the right path, though, by stopping the bleed in revenue growth.
The Bottom Line
IBM stock hasn’t been a barn-burner, and it’s not an exciting tech growth stock.
However, after the lackluster rebound, I think the charts show potential. Combine that with its low valuation, solid operating environment and improving revenue, and I think we could have an opportunity here. A 5.3% dividend yield to boot helps.
Let’s see if IBM can build on that momentum and start off the year with a strong quarter. If it can, upside should follow.
On the date of publication, the InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
