IBM Stock Is a Lot More Attractive as It Refocuses and Trims Down

In the nearly two years since International Business Machines (NYSE:IBM) bought Red Hat, its stock price is up just 1.8%. IBM stock has delivered $27.60/share in dividends to its investors.

Sign of IBM with Canada Head Office Building in background in Markham, Ontario, Canada. IBM is an American multinational technology company.
Source: JHVEPhoto / Shutterstock.com

This means IBM stock has delivered a total return of 20% to the “widows and orphans” who hold the stock.

It also means roughly $24.5 billion in cash flow has flown out the door, uninvested.

That’s the problem with dividends in our technology age. There’s an old tech saying that if you’re handing out dividends you don’t have anything better to do with the investors’ money.

Cloud Czars like Facebook (NASDAQ:FB), founded in 2004 and now worth $1 trillion, use cash flow for capital spending instead. This benefits investors more.

If you’re thinking of buying IBM, you’re hoping this error ends after its managed infrastructure business, Kyndryl, becomes independent late this year.

You’re hoping the dividend ceases to be an issue.

A Closer Look at IBM Stock

Kyndryl is expected to generate roughly $19 billion in sales per year when it’s spun out, into offices atop a skyscraper next to Grand Central Station.  What remains will have roughly $54 billion in revenue and claim leadership in “hybrid cloud.”

This could be the right time for such a move, as many companies are coming down with cloud “sticker shock.”

According to analysts at Andreesen Horowitz’s new online publication Future, cloud margins compress over time. Companies that adopt the hybrid cloud model could end up saving $500 billion/year.

This would be the sweet spot for the new IBM, and the Achilles heel of companies like Amazon.Com (NASDAQ:AMZN). Questions of where data is located, called cloud sovereignty, can complicate matters, but IBM thrives on such complexity.

Investors Walk Away

Most investors don’t recognize the opportunities, at least regarding IBM. Hedge funds have been walking away from the stock. Tipranks lists just eight analysts following IBM, only half of whom want you to buy it.

But there are signs of a turnaround. IBM next reports earnings on July 19. Analysts expect revenue of $18.29 billion and earnings of $2.25/share.

The March quarter, which beat estimates, saw $1.06/share of net income on revenue of $17.7 billion.

If IBM can hit its estimates investors could see an historic breakout, according to Alan Farley of FX Empire.

IBM’s stock price has been falling for years, to as low as $91/share at the height of last year’s pandemic. Investors who bought then have seen a gain of around 52%, but the NASDAQ’s gain has been 108%.

IBM Strategy

IBM’s strategy heading into the spin-off will be based on “industry clouds,”  something also being embraced by Cloud Czars Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL).

IBM’s hope is that hybrid cloud will become a default corporate IT design, seeking to make internal systems as efficient as cloud.

While IBM does have its own cloud, it’s miniscule compared with those of the giants. Synergy Research says IBM is now fifth in the global cloud rental market, having been passed by Alibaba Group Holding (NASDAQ:BABA).

But its relatively small size may not be a hindrance if it’s also dedicated to building out clouds for clients and moving workloads for cost efficiency.

The Bottom Line

If you look up IBM in the news, you won’t see much focus on its hybrid cloud strategy. Instead you might read about storage systems, about quantum computers, about government contracts or disputes with its old chip foundry. 

But don’t be fooled. IBM now has a strategy, to off-load the dividend, and focus on hybrid cloud. If it works, and it might, it could be “IBM to the Moon.”

On the date of publication, Dana Blankenhorn held LONG positions in AMZN, FB, and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.


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