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International Business Machines Is No. 3 With a Bullet

Will Ashworth

Who can forget that famous line by radio personality Kasey Kasem, “Number One with a bullet?” Kasem was talking about a particular song moving up the charts quickly, but the same could be said about International Business Machines Corp. (NYSE:IBM) and IBM stock.

How so?

Well, it’s hard to believe, but the company that’s best known for mainframes is making a serious push into the cloud and now sits third in a list of the top ten cloud-computing vendors compiled by Bob Evans, a media veteran who’s followed the tech industry for 20-plus years. 

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You read that right.

It is ahead of both Salesforce.com, Inc. (NYSE:CRM) and Sap Se (ADR) (NYSE:SAP) in the cloud wars and barely behind both Microsoft Corporation (NASDAQ:MSFT) and Amazon.com, Inc. (NASDAQ:AMZN) in first and second place, respectively.

A measly $900 million separates IBM’s trailing 12-month cloud revenue from Microsoft, the leader among top ten cloud participants with $16.7 billion in TTM cloud revenue. And that’s got to be considered a good thing if you own IBM stock.

Yes, Microsoft touts a forward-projected run rate of $20.4 billion. But I’m going to go with what has come before and not what might come in the future. Apples-to-apples, if you will.

Move to Cloud Good for IBM Stock

According to Evans, it’s helping companies move from legacy, on-premise computer systems to those run in the cloud.

“IBM has quietly created a $15.8-billion cloud business (on trailing-12-month basis) that includes revenue of $7 billion from helping big global corporations convert legacy systems to cloud or cloud-enabled environments,” Evans wrote in Forbes November 7. “And like #1 Microsoft, IBM plays in all three layers of the cloud — IaaS, PaaS and SaaS.”

Back in November, InvestorPlace’s Tom Taulli touted the strengths of IBM’s cloud business suggesting that it’s got the global capabilities to remain competitive in the cloud and even thrive in it. 

“Look at HSBC Holdings plc (ADR)(NYSE:HSBC),” Taulli wrote November 8. “The company has signed on with IBM to pull off a massive revamp of its IT infrastructure with cloud technologies. It has involved data center support for banking locations for 60 countries.”

That’s a massive endeavor that only companies such as IBM can pull off. Going forward as more businesses move to the cloud, whether it be public, private or a hybrid, they’re going to look to Big Blue for help.

Given it plays in Infrastructure as a Service (IaaS), Platform as a Service (PaaS) and Software as a Service (SaaS), that’s going to be good for IBM stock, regardless of what you might think of the rest of its business.

Is IBM Stock Cheap?

Taulli believes it is at 11x forward earnings, considerably less than MSFT at 26x earnings and AMZN at an eye-popping 132x earnings.


Meanwhile, Lawrence Meyers, another contributor at InvestorPlace, believes IBM remains stuck in the last century. Trading at a premium valuation given its ongoing decline in earnings and revenues — Q3 2017 was the 23rd consecutive quarter with a year-over-year drop in sales — he believes the IBM stock price is anything but cheap.

Where do I stand?

As long as the non-cloud aspects of IBM’s business don’t disappear anytime soon, I see it as very cheap given the work it’s doing to help move legacy systems to the cloud.

As I stated in my most recent article about IBM, it has a free cash flow yield of 6.5% for the trailing 12 months compared to 5.4% for Microsoft and 1.3% for Amazon.

One could argue that it’s wiser to take the slightly lower FCF yield provided by MSFT because its overall business appears stronger than to roll the dice with IBM and its 3.9% dividend yield.

I disagree.

Microsoft was in this very spot three years ago.

I see IBM turning the corner. Maybe not as fast as Warren Buffett would like, but enough progress is on the table suggesting you could make a lot worse investments in 2018 — and many will do exactly that.

In the past 11 years, IBM stock has gained more than 20% on just three occasions: 2009, 2011, and 2016. I see a fourth on tap in 2018. 

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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