Patient Investors Should See Significant Growth in International Business Machines

Investors in technology giant International Business Machines (NYSE:IBM) stock have not had a good year so far in 2022. Currently, IBM stock is changing hands around $124.50, down 7% since January. By comparison, major benchmarks, the Dow Jones Industrial Average (DJIA) and Nasdaq 100, have declined around 6.3% and 14% year-to-date (YTD).

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

In 2021, IBM shares soared from $113 to almost $146, a multi-year high, over a four-month period from mid-February to mid-June. But since then, the stock has been swinging in a wide range.

Yet, despite the volatility in the share price, management is taking concrete steps for gaining market share in leading edge segments, such as such as artificial intelligence (AI), cloud computing, and IT infrastructure. As a result, investors have been excited about the development thanks to the outlook for these niche areas.

For instance, in 2020, the global artificial intelligence market was valued around $51 billion in 2020. Yet, increased digitalization during the pandemic has meant tailwinds. Now, the market is forecast to exceed $640 billion by 2028. Such and increase would mean a compound annual growth rate (CAGR) of over 36% from 2021 to 2028, according to Verified Market Research.

However, the competition in tech industry is fierce and IBM’s initiatives will need time to payoff. Therefore, potential investors need to take a long-term approach with an investment in IBM stock. Here’s why.

IBM Stock’s Q4 Results

Legacy technology giant International Business Machines offers integrated services, including software, hardware, cloud solutions, and consulting.

IBM announced fourth-quarter earnings on Jan. 24. Revenue of $16.7 billion implied a growth of 6.5% year-over-year (YOY). The rise in sales was mainly due to clients’ increased hybrid cloud adoption, which also boosted growth in consulting and software services.

Net income came in at $3 billion, or $3.35 per diluted share, up 80% and 78%, respectively, compared to prior-year quarter. Cash and equivalents ended the quarter at $6.65 billion, down $6.5 billion from the same period in 2020 due to acquisitions and debt reduction payments. Free cash flow was $3.35 billion at quarter end.

Meanwhile, the board returned $5.9 billion to shareholders in dividends. The current price supports a juicy dividend yield of over 5.2%.

Looking ahead, management anticipates mid-single-digit revenue growth in 2022. Free cash flow is projected to be between $10 billion and $10.5 billion.

Prior to the release of quarterly metrics, IBM stock was trading around $128. By Feb. 4, it was shy of $139. Now, shares change hand around $124.50.

Adding IBM Stock to Portfolios

Among 16 analysts polled, IBM stock has a “hold” rating. Also, the consensus of 17 analysts for a 12-month median price target stands around $145, implying an upside potential of over 16% from current levels. The 12-month price estimates for the stock range between $115 and $185.

The company’s price-to-sales (P/S) and price-to-book (P/B) ratios stand at 1.96x, and 5.9x, respectively, according to Yahoo Finance. Meanwhile, shares currently trade at 12.18x forward earnings. These metrics imply a relatively attractive valuation for the stock.

By comparison, its rivals in the hybrid cloud segment, Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) change hands at 52.63x and 31.45x forward earnings.

According to Statista metrics, the hybrid cloud market is projected to grow from $56 billion in 2020 to reach $145 billion by 2026. Therefore, potential investors might want to keep IBM stock on radar and invest in at the next pullback, especially around $120, or even below.

Interested readers could also consider buying an exchange-traded fund (ETF) that provides exposure to IBM stock. Examples include the First Trust NASDAQ Technology Dividend Index Fund (NASDAQ:TDIV), the Global Beta Smart Income ETF (NYSEARCA:GBDV), the Invesco Dow Jones Industrial Average Dividend ETF (NYSEARCA:DJD), the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), and the Schwab US Dividend Equity ETF (NYSEARCA:SCHD).

The Bottom Line 

Over the past decade, IBM has been investing in new segments in the ever-evolving tech industry. For instance in 2019, the company acquired the cloud heavyweight Red Hat for $34 billion. Since then, the main focus has been AI and the hybrid cloud markets.

In June 2021, IBM introduced Europe’s most powerful industrial quantum computer in Germany. In addition, the tech giant recently announced a collaboration with Raytheon Technologies (NYSE:RTX) to deliver AI and quantum computing services for the aerospace, defense, and intelligence industries.

Meanwhile, the technology pioneer completed the spinning off its IT services business Kyndryl (NYSE:KD) in November 2021. Also, in early January, it sold its healthcare data and analytics segment Watson Health business to Francisco Partners, a private equity firm, for over $1 billion.

Lately, IBM announced that it acquired Sentaca, a leading telco consulting services and solutions provider, to advance the hybrid cloud consulting business.

As a result of these transition efforts, IBM is likely to create significant shareholder value in future quarters. However, given the potential headwinds such as uncertain macroeconomic environment and jittery markets, IBM shares could come under further pressure in the coming weeks. Yet, buy-and-hold investors with a two- to three-year horizon could consider investing around $120.

On the date of publication, Tezcan Gecgil 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.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.


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