For many years, technology icon IBM (NYSE:IBM) has offered investors a perplexing look. Although “Big Blue” has all the right components to theoretically make a charge at the coming wave of innovations, IBM stock has floundered. Essentially, the whole is less than the sum of its parts. Yet I believe this dead money investment is finally turning around.
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I’m not alone in my bullish assessment of IBM stock. Recently, the tech giant announced that Ginni Rometty is stepping down from her CEO role. A controversial figure on the Street, Rometty hasn’t exactly appeased investors. When she took over the reins in January 2012, Big Blue’s shares were streaking toward $200; indeed, IBM hit this threshold multiple times early on in her tenure at the top.
However, Rometty couldn’t generate much excitement and credibility toward the company’s shift toward relevant markets like cloud computing. Instead, IBM steadily faded into the background. At one point, the organization recorded 22 straight quarters of declining revenue.
Thus, it’s no surprise that IBM stock popped on the announcement of her departure. Since the spring season of 2013, shares have been mired in an ugly bearish trend channel.
At the same time, I don’t think it’s fair to dump all of IBM’s problems on Rometty. When she assumed control, the company had basically maxed out the capacity of its legacy businesses. Competitors like Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) were busy making inroads to the cloud as opposed to on-premise software platforms.
To catch up, Rometty pushed for pertinent acquisitions, most notably the $34 billion Red Hat deal. Unfortunately for her, investors’ patience simply ran out before the implied narrative could come to fruition.
Synergies Are What Makes IBM Stock Compelling
Still, that doesn’t mean that the IBM stock of today will follow the same path of years ago. With most of the weak hands flushed out of the name, this perennial dinosaur can finally gain traction.
Earlier, I mentioned that the many acquisitions that the company made failed to spark meaningful growth. Worse, with revenue declines and a pessimistic outlook, Rometty was on borrowed time. Nevertheless, she did what she had to do. Irrespective of the results, today, IBM is in a much better position to leverage tomorrow’s lucrative markets.
First, relatively few folks are giving Big Blue the credit it deserves regarding its long-term cloud strategy. In an email to InvestorPlace.com, IBM corporation communications representative Tim Davidson noted that “for several years, industry analysts (Gartner, Synergy, Canalys) have been including Google as a Top 3 cloud provider alongside AWS and Microsoft, without having any sense of Google’s actual cloud revenue (since it was never reported).”
But in Alphabet’s latest fourth-quarter report, it revealed full-year 2019 cloud revenue. It turned out that “IBM’s cloud revenue for 2019 was more than 2X Google’s cloud revenue.” Therefore, just on a mano-y-mano comparison, the company is making serious progress, yet this is not fully reflected in the IBM stock price.
More importantly, IBM has an advantage where others are lacking: synergy. In addition to the cloud expertise inherent in the Red Hat deal, IBM has extensive acumen in artificial intelligence and cybersecurity. Therefore, the organization is able to offer comprehensive solutions to high-margin enterprise-level customers.
And that was really the point of Big Blue’s acquisitive strategy. In order to compete in tomorrow’s technology marketplace, they had to endure several growing seasons. It just happened that the clock ran out on Rometty.
Setting Up a Contrarian Opportunity
On paper, the bullish thesis runs counter to the fundamentals. Initially, IBM stock appears a great value play thanks to its 14x multiple. However, with consensus earnings per share estimated to grow only 4.4% in 2020, and with sales projected to grow only 2.3% over the same period, IBM seems destined for mediocrity.
But this is where you got to think like a contrarian. Much of the bearishness has already been reflected in IBM stock: nearly the entire tenure of Rometty was a giant downtrend. However, she managed to bring all the necessary tools together. As I mentioned above, those tools have generated significant traction. Now, we just need management to do their part.
The shakeup at the top offers hope. Rometty’s replacement is Arvind Krishna, who previously served as the senior vice president for cloud and cognitive software. Further, Krishna was instrumental in another area of IBM’s acquisition rollout — the blockchain.
As you know, blockchain technology has very powerful applications toward transactional integrity and security, among many other uses. It’s an area that enterprise-level customers will benefit form and at lower costs due to the blockchain platform’s scalability.
Therefore, this is not the time to cast doubt on IBM stock. Rather, shares are just getting interesting.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
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