Since mid-October, International Business Machines Corp (NYSE:IBM) has shown some strength. But it has not been enough to undo the damage so far. During 2017, IBM stock has shed about 7.5%. This is certainly frustrating since tech companies have seen a nice bull run, including old-line operators like SAP SE (ADR)(NYSE:SAP) and Intel Corporation (NASDAQ:INTC).
Keep in mind that the travails of IBM stock have not been a temporary thing either. For the past five years, the average return has been -2%!
IBM Stuck in the Past?
Now, there are clear reasons for the dismal performance. IBM has been slow to adopt new technologies like the cloud. The company also has several low-performing businesses that have weighed on the top-line. For the most part, the perception is that IBM is, well, a has-been.
Hey, even legendary investor Warren Buffett has lost quite a bit of faith in IBM stock. Back in November, he unloaded about a third of his position, leaving him with a 37-million share stake.
All this seems grim for IBM stock, right? Perhaps so. But it is important to note that the company has a history of dealing with disruptive changes. More importantly, CEO Ginni Rometty has been hard at work restructuring the firm. She has taken the tough steps of cutting costs, laying off employees and divesting business segments. There have also been major R&D investments in next-generation technologies.
It’s true that the results have been choppy. The telling metric is that there have been 22 consecutive declines in revenue.
Righting the Ship
Yet I think things could be turning — and perhaps could provide opportunities for investors in 2018. The latest quarter was a good indication of this. First of all, the revenue decline was a mere 0.4%. There was strength in the mainframe division, which has seen a renewal because of a strong product line, as well as the strategic imperatives category (this includes Watson AI, analytics and the emerging blockchain technology).
But the real star was the cloud business, which grew by 20% to $4.1 billion. And this should not be a surprise. IBM has major advantages, such as a trusted brand, a global infrastructure and thousands of talented engineers. The company’s cutting edge AI and machine-learning capabilities are also standout, which allow for better analytics and insights for customers.
In fact, even IBM’s legacy technologies — such as its private cloud platform — have proven to be synergistic with the cloud strategy. Enterprise customers often want more secure approaches.
As seen with Microsoft Corporation (NASDAQ:MSFT), the cloud can supercharge a mature tech operator. The stock performance definitely bares this out. Over the past five years, the average return has come to 27.5%.
Bottom Line on the IBM Stock Price
While I do not want to underestimate the issues, I still think much of the bad IBM news is baked into the shares. Consider that the valuation is currently at fairly low levels, with the forward price-to-earnings ratio at 11. In other words, Wall Street’s expectations are at depressed levels.
But, again, the cloud business has the potential of lifting growth. What’s more, the company has many options to continue with the restructuring.
In a recent post for InvestorPlace.com, Dana Blankenhorn pointed out some interesting scenarios: the sale of the Global Technology Solutions segment or even the unloading of the mainframe business. Such moves would not only result in a nice chunk of cash, but would also allow the company to focus more on growth areas.
For the most part, IBM stock represents an interesting value opportunity. And let’s face it, there are not many of these in tech right now. Besides, there is a decent yield of 3.9% and the cash flows should continue to pile up for some time, allowing the company to double down on cloud and AI opportunities.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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