It’s been an ill-fated few years for tech giant IBM (NYSE:IBM) stock.
The company has evolved quite a few times over the years, and investors have found it tough to pin their hopes on Big Blue.
However, with its recent results, it appears that its efforts are bearing fruit. On top of that, IBM stock is attractively valued compared to other tech darlings of Wall Street.
The lack of investor excitement surrounding IBM stock has meant that it has returned a measly 20% in the past 12 months.
Moreover, it has underperformed the S&P 500 by -20.1% in the past year. As a result, the stock has been unattractive from a fundamental perspective, but its hybrid cloud strategy shifts the narrative in its favor.
It will be interesting to see how it builds on its relatively strong performance in the first quarter over the next few quarters, but for now there are several positives to consider with IBM.
IBM’s Cloud Transformation
IBM’s first-quarter results showed 1% sales growth from the same period last year. Its cloud computing sector is a key contributor, providing roughly 36.7% of its $17.7 billion revenue. Its first-quarter results continued IBM’s trend of double-digit year-over-year gains in cloud revenue.
IBM had acquired RedHat Technologies in 2019 to re-invigorate its product base and enable it to gain a stronger foothold in the hybrid cloud. As a result, its cloud business is now growing rapidly, and the first-quarter results are a testament to that.
Revenues from the division grew 18% on a year-over-year basis. Moreover, there was a healthy 34% increase in cloud and cognitive software sales along with a 28% increase in cloud sales in global business services.
A few analysts feel it’s tough for IBM to continue growing its cloud revenues for the next few years. However, cloud applications and software demand are growing rapidly and hybrid cloud is a major part of that.
At the same time, IBM needs to continue executing its strategy to gain traction with new clients. To that end, it is developing relationships with new software partners such as Palantir (NYSE:PLTR) to gain new clients.
Moreover, IBM also must maintain its leadership position in patents and use them to drive revenue growth.
Financial Flexibility and Dividend
IBM’s management has done an excellent job of tremendously improving its financial flexibility and the safety of its dividend. As a result, its first-quarter results show that its total debt has been reduced by $5.1 billion. After March, its cash balance was at an impressive $11.3 billion while its core debt declined to $38.1 billion.
To put things in perspective, its core debt before its RedHat acquisition was $48 billion, while its global financing debt was at $18.3 billion. Moreover, its interest expenses in the quarter after the RedHat acquisition were at $432 million, which are currently down to $280 million.
In terms of dividends, the company has been a dividend aristocrat, raising its dividend for 26 years.
Its yield of 4.5% is more than double that of the average for the S&P 500. Moreover, its forward payout of $6.5 and a payout ratio of 60% rounds off an enviable portfolio.
Bottom Line on IBM Stock
IBM has had some soul-searching in the past few years, but it appears it is finally on the right track. Its hybrid cloud strategy will define its future, and other initiatives in AI and analytics will complement it.
Moreover, there is plenty of upside remaining to its cloud business, and its financial flexibility will enable it to expand at a healthy pace.
The cherry on top is its price, which is significantly lower than other tech giants. Therefore IBM is a buy at this stage.