Few companies have such a long and storied history as IBM (IBM), which set the course of computer technology for decades. Now, with the company has undergone a long and massive restructuring and putting a new chief executive at the helm, is IBM stock a buy?
Originally named International Business Machines, IBM helped pioneer multiple segments of the computer industry.
But IBM today is not the dominant force it once was. The rise of the internet and the explosion of new technology companies that emerged in the 1980s dramatically changed computer architecture. IBM’s giant mainframe computers, which could be the size of an elephant, became a metaphorical elephant.
The company was caught off-guard as customers shifted from centralized computing to a technology network that was highly distributed.
Spending $120 Billion To Remake IBM
That caused IBM to begin a dramatic restructuring that subsequently led to long-term recovery in IBM stock.
In the past 8 years, IBM has invested more than $120 billion in remaking the company. This includes $29 billion in capital expenditures, for things like scaling its cloud operations and artificial intelligence offerings and bolstering security and services capabilities.
It spent $45 billion on research and development, focusing on building its cloud and cognitive offerings, as well as blockchain technology and quantum computing.
The company also spent $53 billion to acquire 65 businesses in the past eight years. The largest was Red Hat, an open-source software provider. In addition, IBM divested 47 businesses that no longer fit the company’s strategic focus on high-value areas. The company poured billions into software and consulting. Today, IBM consists of several business units.
Two of those units, Global Technology Services, and Global Business Services, provide infrastructure and cloud services and technology support. In addition, this includes consulting, application management, and global process services. These two units combined reported first-quarter revenue of $10.6 billion, representing about 60% of IBM sales.
Big Push into Cloud Computing
However, the rising star at IBM is its Cloud and Cognitive Software business unit. It provides a variety of cloud computing services, data, and transaction processing platforms. It also includes what IBM calls cognitive applications, which is another term for artificial intelligence. In the first quarter, this unit showed revenue of $5.2 billion, accounting for about 30% of IBM sales.
It’s also where IBM’s $34 billion deal to acquire Red Hat was placed. Red Hat provides an open-source, cloud software business. It was key in IBM’s massive expansion into offering a hybrid cloud architecture to its customers.
Hybrid cloud architecture means IBM can provide its customers with both a public cloud and a private cloud, which gives a company extra network security. Data and applications can be shared between them.
Krishna’s Origins in Cloud Business
Krishna was previously senior vice president for the Cloud and Cognitive Software business. He officially took the reins in April, succeeding Ginni Rometty, who had led the company since 2012. At the time he became CEO, IBM stock jumped 5% on the news.
IBM derives cloud revenue from several of its business units. In the past 12 months, IBM says it collected about $22 billion in cloud revenue. In 2013, the cloud represented only 4% of revenue. Today, it’s 30% and growing rapidly.
In addition, IBM has returned $97 billion to shareholders in the last eight years. In April, IBM raised its annual dividend to $6.52 per share. It was the 25th consecutive year that the dividend on IBM stock has increased. It’s why IBM is considered a top dividend stock.
The major shifts in business operations help to explain why growth in revenue and earnings has been a struggle. In the past 19 quarters, revenue in 16 quarters showed declines or no growth from the year-ago period. Earnings’ performance also was weak.
IBM Beats on Earnings, Misses On Sales
IBM reported first-quarter earnings on April 20 that beat analyst projections on the bottom line but missed on revenue. It reported adjusted earnings of $1.84 per share, down 18% but ahead of estimates for $1.81. Revenue dropped 3% to $17.57 billion. Wall Street expected $17.7 billion. Since the earnings report, IBM stock is up just 2%.
For the current quarter, the Wall Street estimate on adjusted earnings is $2.06 per share. That would be down 35%. Analyst views call for revenue of $17.4 billion, off 9%.
The company withdrew 2020 guidance due to the coronavirus pandemic conditions.
The March-quarter report was the first since Krishna became CEO, with Wall Street analysts seemingly encouraged by his presentation. IBM has focused heavily on improving profitability over the last several years. But Krishna indicated he prefers to put more emphasis on revenue growth.
“Unlike prior leadership’s focus on earnings and cash flow, Arvind is more focused on revenue growth, which better aligns with what drives investor sentiment and valuation multiples,” Morgan Stanley analyst Katy Huberty wrote in a note to clients following the earnings report.
IBM LONG (Buy)
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