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Proprietary Data Insights Financial Pros’ Top IT Services Stock Searches in the Last Month
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Can IBM Finally Get Out of Its Own Way? |
International Business Machine (IBM) is a Harvard Business case study for how to transform a company correctly and incorrectly simultaneously. The once dominant computer company shifted to consulting in the late ‘90s. While that staved off immediate destruction, it put the company in a malaise for the next 20 years. Share prices are literally where they were during the dotcom bubble (dividends excluded). As the company struggles to gain a foothold in popular categories from cloud services to AI, financial pros began looking into Big Blue more urgently after their latest earnings announcement. Other than being a 20-year value trap, is there an investable opportunity? IBM’s Business Besides being a leader in quantum computing, IBM is a multinational technology company that provides various solutions and services to businesses. The company breaks down into four segments:
IBM’s latest quarterly report showed meaningful gains in software and consulting revenues, while infrastructure declined 14% amidst intense competition.
Source: IBM Q2 Earnings Presentation Most people aren’t aware, but IBM is also a leader in blockchain technology, with its IBM Blockchain World Wire, a global payments network, set to grow exponentially in the coming years. Financials
Source: Stock Analysis IBM has struggled to find revenue growth despite a series of acquisitions. Like AT&T, it’s held back by legacy businesses that hurt its top and bottom lines. Gross margins have improved as the company shifts towards software and consulting. However, it’s operating and profit margins declined as SG&A costs remained high and tax benefits subsided. Operating cash flows declined from around $15 billion prepandemic to closer to $12 billion. Total and net debt also skyrocketed to $63 and $44 billion respectively after the company $34 billion for Red Hat cloud solutions in 2019. Nonetheless, IBM generates enough free cash flow to cover their 4.73% dividend yield by roughly 2x. Valuation
Source: Stock Analysis IBM’s lack of growth has it labeled as a ‘value trap.’ It’s larger than average dividend helps it garner a better price. Nonetheless, it trades at a discount to most of its peers, save Xerox (XRX) on a price-to-earnings and price-to-cash basis, and Fidelity National Information Services (FIS) on a price-to-cash basis. Growth
Source: Seeking Alpha IBM’s growth is miserable, barely reaching single digits most years for revenues, and for revenues or any profit measure, negative when looking back over several years. None of its peers performed that badly. Profitability
Source: Seeking Alpha Gross margins look great for IBM, as do its EBIT and EBITDA margins. But as the return on equity, assets, and total capital demonstrate, it can’t really do much with its resources. Our Opinion 4/10 IBM might be a good stock to work with some covered call strategy. But as far as an investment, there’s no reason to believe they’ve changed. Growth is out of reach, and there’s no tangible plan to change the company anytime soon. |
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