Value and safety-minded investors like to point to International Business Machines (NYSE:IBM) as an example of a relatively safe company with a rich history. This idea has been tested recently, however, as the share price tumbled from $151 to $136, with a nasty -2.83% drop on the day I’m writing this.
So yes, the IBM stock price has been hammered, but is that a good reason to abandon this computing pioneer?
I can think of at least three reasons to hold on to your International Business Machines stock shares — and perhaps even add to your position at what I would consider to be a better-than-fair price.
Behold: IBM Finally Gets into the Cloud
A primary reason for IBM’s struggles in recent years is the fact that the company has been a laggard when it comes to getting into cloud-based technology. With the acquisition of cloud superstar Red Hat (NYSE:RHT), however, IBM should now become a serious contender in the open-source software sub-sector of the cloud.
The upshot, I believe, will be a bottom-line improvement in IBM’s revenues, as Red Hat’s 85%+ gross margins and 20%+ operating margins make it a proven revenue overachiever; Red Hat’s addition of $500 million worth of free cash flow is also a nice bonus. Granted, IBM should have gotten into the cloud in 2010 or 2011, but the Red Hat acquisition is a brilliant move and should help the company play catch-up. Better late than never, you know?
Q3 Earnings Will Support the IBM Stock Price
Related to the first catalyst, the Red Hat acquisition, is the fact that this was not factored into the results for IBM’s second-quarter earnings. That means that this game-changing move into the cloud will impact the upcoming third-quarter earnings report. I expect the result to be a swift move to the upside for the IBM stock price.
Back on July 17, when IBM reported earnings that outperformed analysts’ expectations for Q2 of 2019, the company provided an impressive full-year earnings-per-share guidance of $13.90 — again, excluding the Red Hat factor.
Revenues were fully in line with analysts’ projections at $19.16 billion, while the actual EPS of $3.17 easily beat the analysts’ forecast of $3.07; nonetheless, the market hasn’t reflected any of this in the IBM stock price, which is why I feel that the upcoming Q3 earnings release will be IBM’s opportunity to turn investor sentiment around and, hence, catch a bid for the share price.
Trade-War Woes Won’t Last Forever
The ongoing conflict between the United States and China feels like it will drag on until the end of time; few among us ever imagined that it would have lasted this long without a resolution in sight. The tech sector has been hit harder than most, and the IBM stock price has suffered collateral damage in this heated, protracted tariff war.
Having been in the investing game for longer than some of my readers have been alive, I can assure you right now that the tariff dispute will end and the stock market will experience, at the very least, a short-term relief rally bordering on outright euphoria.
No one is blaming International Business Machines for the political and/or economic tug-of-war between to global superpowers, and IBM shares have the potential to make an outsized, north-bound move when a trade pact is finally reached — probably sooner than later, as an election cycle will be upon us in 2020.
The Takeaway on IBM Stock
Between the Red Hat acquisition, the potential for a positive Q3 earnings surprise, and the imminent resolution to the tariff war, I’m envisioning a powerful move for IBM stock. International Business Machines stock is down but not out, as multiple factors all point to a company that’s looking to the future even if short-sighted investors are still obsessing over IBM’s past.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
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