On Wednesday , International Business Machines (NYSE:IBM) stock did something unusual: it outpaced the stock market, closing up 1.7% against the Dow Jones’ less than 1% move. Could this be a sign of things to come for IBM stock?
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Of course, one should never read into any one market event too closely. Currently, multiple macro headwinds exist, including an escalating U.S.-China trade war and concerns of a looming recession. If we do suffer a downturn, that would threaten virtually all stocks. Fear begets fear, and IBM stock would not be spared.
That said, a recession doesn’t necessarily spell catastrophe. For one thing, a market correction could still be considered a healthy occurrence for stocks’ longer-term outlook. Moreover, an economic slump may force us to eliminate dead weight. Granted, a recession will generate pain, but it will also likely streamline the economy.
Additionally, IBM has some attributes that I believe many analysts are either overlooking or discounting too sharply. As a result, the shares look like a contrarian opportunity, especially if the IBM stock price hits last year’s lows. Here are three reasons why I believe that:
IBM Stock Has Relatively Limited Exposure to China
In the fourth quarter of last year, technology firms collapsed as the trade war kicked off. However, Wall Street put aside its concerns in the new year as the geopolitical outlook started to stabilize.
That sentiment reversed again, though, in August, as the U.S. and China ratcheted up the rhetoric and pressure. And by the end of the month, President Trump announced a tariff hike on essentially all Chinese imports. Unsurprisingly, International Business Machines stock, along with other tech investments, felt the heat.
Nevertheless, International Business Machines stock looks interesting relative to its peers. That’s because the IBM stock price isn’t as levered to the trade war as you might imagine.
For instance, in 2018, the company’s Asia Pacific revenue totaled $17.1 billion,, below the company’s other two regions, which are the Americas, and Europe, Middle East, and Africa. Asia represented a little over 21% of IBM’s total corporate revenue last year.
Let’s compare that to some of IBM’s competitors, like Intel (NASDAQ:INTC) or Nvidia (NASDAQ:NVDA). China accounted for approximately 25% of Intel’s revenue, while it generated about 20% of Nvidia’s top line. Moving forward, exposure to an increasingly assertive China is a risk factor. But it’s much less worrisome for IBM stock. than for Intel, Nvidia, and many other tech names.
IBM’s Long-Term Cloud Potential
Naturally, this has caused people to adopt a pessimistic view of International Business Machines stock. Frequently, pundits and analysts say that IBM paid too much for Red Hat and is getting very little in return. But I think this is a short-sighted way to look at this key acquisition.
Although AWS has been around for a few years, the cloud is still in its infancy. But as this technology evolves, so will users’ demands. Therefore, it’s unlikely that one type of solution will be appropriate for every company.
And that’s where the Red Hat deal comes in. The acquired company specializes in hybrid cloud solutions, which involves interconnecting multiple cloud and enterprise-level platforms. Such a structure can easily accommodate growth, both in terms of size and functionality.
For instance, some organizations may find the typical solution of centralizing large data centers too costly. Thus, bringing cloud connectivity closer to the source of the action, through a system called edge computing, is becoming more popular. With Red Hat, IBM has become the edge computing leader, potentially making International Business Machines stock more valuable.
Stock Cycles Favor International Business Machines Stock
I find it interesting that over the last five years, Advanced Micro Devices (NASDAQ:AMD) underwent a huge turnaround, while IBM stock price steadily eroded from near $200 to its present price of under $140.
Based on this historical comparison, the mainstream instinct is to pile into the winner. But stocks tend to work in cycles: no investment is ever permanently bullish nor bearish.
As a result, I believe the IBM stock price is due to rebound. Fundamentally solid names don’t stay undervalued indefinitely.
But I’m not just basing my optimism on the cyclical nature of stocks. Rather, a combination of positive catalysts is making me more upbeat on International Business Machines stock. As I mentioned earlier, IBM isn’t as levered to China as its peers. That will come in handy if the trade war worsens, which it’s likely to do.
Also, I think critics are focusing too much on Red Hat’s headline costs, and not enough on its potential. If I know anything about tech, it’s that it always changes. What worked a few years ago may be condemned to obsolescence later.
Consider not what IBM is today, but what it’s gearing up to be tomorrow, it’s hard not to be a little excited about international Business Machines stock. Plus, the current cheapness of IBM stock doesn’t hurt.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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