When it comes to great tech stock picks, International Business Machines Corp. (NYSE:IBM) is probably not the first to spring to mind. IBM stock has been steadily declining over the past five years and for good reason.
The firm’s antiquated hardware business is losing steam, and its efforts to shift its focus toward software and services has done very little to move the needle back into a profitable direction.
I know, we’ve been hearing about IBM’s turnaround story for years without any evidence that it’s actually coming, but there’s a lot to like about IBM, and I think a little bit of patience could pay off in a big way for Big Blue investors.
IBM Stock Is Appealing to Everyone
What I like most about IBM stock right now is the firm’s impressive 4% dividend yield, something you’d be hard-pressed to find elsewhere in the tech space, especially with a P/E ratio of just over 12. The company is in the midst of a turnaround, and if you’re willing to believe that the firm will eventually return to profitability, then it’s a really cheap buy.
At its current valuation, it appears that investors see the firm continuing to turn in lackluster performances quarter after quarter for the foreseeable future. That’s a good thing if you see even a glimmer of hope for IBM because it means that even the most unimpressive improvements will help bring the stock higher. It’s an unusual case in which the uncertainty facing the stock makes it a great value play, but the dividend payments are appealing from an income standpoint.
Assuming the firm continues to struggle for another year or more, it’s important to note just how safe the company’s dividend payments are. IBM generates an insane amount of cash, and its payout ratio of 47% means that there is even room for a dividend increase.
Believe in Big Blue
Part of the reason I am not quite as negative as many of my colleagues regarding IBM stock is that I put a lot of value in the company’s historical performance. As a business that’s been around for more than 100 years and thrived for the better part of those decades, I think IBM has proven itself to be resilient and malleable.
Back in the early days, IBM was making household machines like clocks and scales. The firm eventually evolved into a computer-making company, and now we’re watching Big Blue morph once again into a service and software firm.
IBM’s experience changing with the times gives me confidence in the firm’s ability to weather this storm and come out the other side as a stronger company. I think IBM’s struggles with declining revenue over the past five years is par for the course for such a big company making such a large change.
What’s Next for IBM Stock
While IBM news would have you believe it’s all doom and gloom, Big Blue actually has a lot going for it. First, the company’s Watson supercomputer has the potential to reform the way we diagnose and treat diseases, an achievement that would have overwhelmingly positive financial and social results.
While some are quick to dismiss Watson because the supercomputer hasn’t had an immediate impact on IBM’s balance sheet, I believe CEO Ginni Rometty when she said IBM is playing a long game with Watson.
Watson is a bet on the growing interest in Artificial Intelligence, and it’s a smart bet for IBM. The computer is made to work alongside humans and enhance their productivity, so it will become more and more useful as AI gains traction.
Even if you’re a Watson skeptic, IBM stock still offers investors a play in some other developing technologies. The company is also making big bets on blockchain, the technology that powers cryptocurrencies like bitcoin.
While there are still some questions as to whether cryptocurrencies will flourish or falter, blockchain appears to have staying power, and many believe it will become a fundamental building block for everything from communication to security in the future. According to Juniper Research, IBM is an industry leader when it comes to blockchain, so the firm will be a huge beneficiary when the technology gains momentum.
The Bottom Line on IBM Stock
IBM stock isn’t dead yet, and investors would be wise to pick it up now before it starts to gain momentum. Because sentiment regarding Big Blue is so bearish, even the slightest sustainable improvements are likely to be celebrated in a big way.
This summer, IBM launched a new mainframe system which is expected to improve revenue, and the firm may also enjoy currency tailwinds during the second half of the year. Those factors could help IBM announce solid results for the third and fourth quarter, and if the firm is able to maintain that momentum through the beginning of 2018, I’d say we are in turnaround territory.
— Laura Hoy
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Source: Investor Place