Hybrid-Cloud Revenue Expansion Bodes Well for IBM

Some folks might write IBM (NYSE:IBM) off as a legacy business that is not a technology innovator anymore. Yet, there are reasons to believe that IBM stock has upside potential as the company isn’t just an old has-been.

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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First of all, the stock is trading at a low valuation. Secondly, the company is now a new, slimmed-down and more focused version of itself.

Additionally, IBM recently acquired a business which could set the company up as a major competitor in the artificial intelligence (AI) and environmental, social and governance (ESG) markets.

On top of all that, IBM’s financials show that the company is growing its revenues, especially in one high-demand market segment. All in all, we’ll find that there is no reason to worry about this iconic American company being outdated in 2022.

A Closer Look at IBM Stock

From a technical standpoint, IBM stock held up well during the technology-stock rout in December 2021 and January 2022.

Indeed, the stock rose from around $117 in early December to around $130 in late January. That is actually a comparatively good performance amid a broader tech wreck. It just goes to show that value stocks tend to hold up better during market corrections. And there is no denying IBM’s value, as it has a trailing 12-month price-to-earnings ratio of 21.36, which is quite reasonable.

Another feature of IBM stock is its low beta, which suggests that it is not extremely volatile and is, therefore, appropriate for most portfolios. The stock’s five-year monthly beta of 1.13 indicates that it moves almost exactly in tandem with the broader stock market.

Finally, let’s not ignore IBM’s forward annual dividend yield of 4.88%. Long-term investors can collect the generous dividend payments while waiting for the stock price to appreciate over time.

Addition and Subtractions

IBM is a company in transition — no doubt about that. In November 2021, the company divested itself of Kyndryl (NYSE:KD).

Kendryl was IBM’s IT infrastructure services unit. Wedbush Securities analyst Moshe Katri praised the divestiture, saying, “IBM is essentially getting rid of a shrinking, low-margin operation given the cannibalizing impact of automation and cloud, masking stronger growth for the rest of the operation.”

Furthermore, global investment firm Francisco Partners has agreed to acquire healthcare data and analytics assets from IBM that are currently part of the Watson Health business. IBM Software Senior Vice President Tom Rosamilia called this arrangement a “clear next step as IBM becomes even more focused on our platform-based hybrid cloud and AI strategy.”

On the other hand, IBM is also diversifying its business model. Specifically, the company has acquired Envizi, a data and analytics software provider for environmental performance management. The Envizi acquisition builds up IBM’s investments, not only in AI-powered software, but also in the field of tech-enabled sustainability-insight solutions.

Hybrid-Cloud Highlights

As noted earlier, Rosamilia suggested that the “next step” for IBM is to focus on its AI and hybrid-cloud businesses.

The company’s fourth-quarter (Q4) 2021 results suggest that IBM is successfully moving in that direction, particularly with its hybrid-cloud segment.

As Arvind Krishna, IBM Chairman and chief executive officer put it, the company “increased revenue in the fourth quarter with hybrid cloud adoption driving growth in software and consulting.”

Let’s see if the data backs this assertion up. During Q4 2021, IBM generated hybrid-cloud revenue of $6.2 billion, up 16% year-over-year. Even the staunch skeptics have to admit that this is a strong result. Moreover, IBM posted full-year 2021 hybrid-cloud revenue of $20.2 billion, which shows a 20% year-over-year improvement.

The Bottom Line on IBM Stock

It is time for the naysayers to stop pigeonholing IBM as an old-fashioned company. In reality, it is entirely possible for an old company to compete in modern, tech-forward business sectors.

Investors will have to accept that IBM is a company in transition. That is not a bad thing, though, as the company’s changes will allow it to adapt to changing market conditions.

Will a slimmer, hybrid-cloud-focused IBM succeed in the long run? Only time will tell, but it is exciting to witness this legendary company’s evolution.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarketsFinom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. 


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