The new, thinner version of IBM (NYSE:IBM) has many characteristics that the Street is likely to adore in 2022 and beyond. Specifically, the company will boast strong leverage to two of tech’s hottest trends, solid profitability, a very attractive valuation, and decent growth. As a result, IBM stock is a buy for many investors at its current levels.
I believe that the jury is still out on whether IBM can become another Microsoft (NASDAQ:MSFT). But at a minimum, in 2022 when many investors are likely to be much less enamored with unprofitable, high-risk stocks and looking for strong, steady growers in the tech sector, Big Blue’s shares are likely to outperform the Nasdaq.
Hot Trends, Strong Approaches, and an Attractive Valuation
IBM’s CEO, Arvind Krishna, is focusing on two areas — the hybrid cloud and artificial intelligence. Those are two of Wall Street’s favorite tech trends.
And drilling deeper, I believe that Krishna’s approach to both areas should ultimately prove to be successful. When it comes to the cloud, the CEO is looking to sell IBM’s software tools that connect multiple public clouds to companies’ on-premise data centers and edge environments.
The recent outage of Amazon’s (NASDAQ:AMZN) AWS system showed that companies which rely on a single cloud infrastructure company are vulnerable to significant periods of downtime. Therefore, I expect more companies, particularly those in sensitive sectors like banking and healthcare, to use multiple public clouds, as well as on-premise data centers and edge environments. As a result, there should be a large market for Big Blue’s hybrid cloud software.
On the AI front, I’ve long been bullish on solutions that are specifically, intensively tailored to the needs of certain sectors. That appears to be IBM’s approach under Krishna.
In a section on AI on its own website, the company states that, “You can build, train and manage machine learning models wherever your data lives and deploy them anywhere in your hybrid multicloud environment.”
“New IBM will have… a higher cash-flow yield, and a much higher return on invested capital,” the company’s CFO recently told Barron’s. In July, an analysis conducted by another InvestorPlace columnist, Mark Hake, indicated that IBM stock was worth $201. 76 based on its Q1 free cash flow yield of 12.4%.
With new IBM’s cash-flow yield and ROIC slated to climb, the value of its businesses is likely to be meaningfully higher than when it was combined with much less attractive segments. As a result, I believe that the current, actual value of IBM’s shares is likely at least 15%-20% above the $201.76 valuation cited by Hake.
Turning to the company’s growth outlook, Big Blue expects its top line to climb about 5% annually from 2022 to 2024.
A Good Stock for the Times
Many on the Street are becoming increasingly concerned about the high valuations of unprofitable growth stocks. And the high likelihood of a quick tapering of the Fed’s bond purchases and higher interest rates next year should intensify the increased aversion to unprofitable growth stocks with huge valuations.
What’s more, cryptos and Meta (NASDAQ:FB) (formerly Facebook) , both of which have attracted huge amounts of money from investors, look to be falling out of favor with the Street.
As a result of these points IBM stock could become very attractive to the “big money” crowd next year. That’s because the company, which Barron’s estimated was changing hands for just 11 times new IBM’s 2022 profits, is highly leveraged to powerful tech trends, but is profitable and has a very attractive valuation.
Moreover, in sharp contrast to both cryptos and Meta, it does not face significant threats on the public relations and regulation fronts.
The Bottom Line on IBM
As I mentioned earlier, it’s too early to say whether IBM under Krishna will be as successful as Microsoft has been with Satya Nadella at the helm. As I indicated in a previous column, I would have been more confident in Big Blue’s growth potential if it had retained former Red Hat CEO Jim Whitehurst, who has a proven record of growing businesses.
Still, given IBM’s growth outlook, I believe that Krishna is starting to turn the company around, and his strategies appear to be very sound. What’s more, the spinoff was a smart move, as it will make IBM stock more valuable and more attractive for many investors.
Finally, as I outlined previously, I think that the company’s shares will be a good fit for the macro environment in 2022 and likely in 2023. I also believe that the shares will be well-positioned to attract some of the money that will likely come out of Meta and cryptos.
Given these points, I believe that IBM, which also carries a 5.4% dividend yield, is a very good fit for income investors, conservative investors looking for exposure to powerful tech trends, and growth at a reasonable price (GARP) investors.
On the date of publication, Larry Ramer did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.