‘Big Blue’ IBM May be a Blue Chip to Buy, Even After its Big Surge

Over the past few months, at a time where most of tech has been tanking, shares in IBM (NYSE:IBM) have performed well. Since November, IBM stock has zoomed from between $115 and $120 per share, to around $135 per share today.

Photo of IBM (IBM) building as seen through the canopy of a tree. IBM logo is in large letters on side of building.
Source: shutterstock.com/LCV

Thanks in large part to strong quarterly results, plus growing confidence in its turnaround plan. Along with both of the reasons, its blue chip status has likely helped it out as well. With the recent market volatility, many have been cycling into perceived safe harbors for more stable returns.

Yet while it’s moved higher, as the market’s moved lower, you haven’t missed the boat completely with this opportunity. Sure, upside potential pales in comparison to younger, faster-growing tech names. IBM isn’t going to double in price within a short span of time.

But for those looking for more stable returns, it may be one to consider. Paying out an above-average dividend yield, and on the path to relatively higher growth, “Big Blue” could perform much better going forward than it has in the recent past.

IBM Stock at a Glance

Admittedly, when you think of IBM, the phrase “tech dinosaur” may first come to mind. However, despite it maintaining its old-school name and logo, calling the International Business Machines of today a dinosaur doesn’t do it justice.

That is, it’s been decades since IBM manufactured PCs or laptops. With last year’s spinoff of Kyndryl Holdings (NYSE:KD), it’s no longer in the low-margin, low-growth IT managed services business. It’s also made some big acquisitions, in an effort to modernize its offerings. For example, its $34 billion purchase of Red Hat in 2018.

Yes, its past restructuring efforts have failed to do much for IBM stock. It may be performing very well compared to the overall market today. But take a look at a stock chart of it from the past five years, or ten years?

It has underperformed by a wide margin. With weak growth, and underwhelming results, past attempts to jolt excitement again for the stock haven’t had much success.

Fortunately, the turnaround plan being implemented now, by CEO Arvind Krishna (who took the helm in 2020), has focused on the company becoming a provider of hybrid cloud services. And, so far, it appears to have had a positive impact on results. Better yet for investors, there may be plenty of room for IBM stock to continue to rise in value at a satisfactory pace going forward.

So Far, So Good With The Turnaround

The phrase “turnaround play” is one that’s thrown around too much on Wall Street. Many such plays seem to be of two different categories. First, companies where management has well-thought out plans to turn things around, and is on point with execution. Second, underperforming companies where there’s “potential” to improve its operations, but for one reason or another, efforts to turn the ship around fail to take.

For a long time, IBM stock has been in the second category. However, based on its most recent quarterly numbers, it may be appropriate to say that it’s starting to fall into the first category. It handily beat on revenue for the December quarter ($16.7 billion, versus forecasts of $16.1 billion). Non-generally accepted accounting principles (non-GAAP) earnings of $3.35 per share came in above the Street’s estimates of $3.14 per share.

Based on these numbers, the hybrid cloud focus is starting to help boost results for its main consulting and software units. However, before you get too excited, keep something in mind. IBM’s performance is getting better on a relative basis. Relative as in high single-digit growth. A big improvement from past results, yet still nothing that’s going to drive a big bolt for shares.

Even so, for those looking for less risk, and at the same time strong returns, this may not be an issue. Given its low valuation, coupled with a moderate bump up in earnings, plus the dividend, there may be enough in play to enable it to deliver worthwhile returns.

The Verdict With IBM Stock

Earning a “B” rating in my Portfolio Grader, it goes without saying you aren’t going to “get rich” owning IBM. But if you’re in the market for blue chip stocks, consider this a solid choice.

Trading for just 13.3x projected 2022 earnings, it’s one of the cheapest Dow Jones Industrial Average components. Before, this low valuation was justified. Today, if it continues on its current path, it may have room for multiple expansion. Maybe not to 20x or 30x, yet to a level that’s moderately above where it is today.

The bottom line is that moderate multiple expansion, combined with higher earnings and its forward dividend yield of 4.91%, could help IBM stock continue its move to higher prices.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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Article printed from InvestorPlace Media, https://investorplace.com/2022/02/ibm-stock-big-blue-blue-chip-to-buy-even-after-its-big-surge/.

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