With AI investing gaining significant attention lately, fundamentally sound tech stock International Business Machines Corporation (IBM) should benefit in the months ahead. The company’s ability to deliver solid results amid tough economic conditions last year underscores its fundamental strength to survive the potential economic challenges this year.
I have explained why I am extremely bullish on the stock in this piece.
In the fiscal year 2022, IBM achieved its highest annual revenue growth over a decade. Moreover, it surpassed Wall Street's fourth-quarter revenue expectations due to an increasing number of businesses seeking to streamline their operations and reduce expenses with the help of IBM’s services during a period of economic downturn.
The software and consulting company returned $1.5 billion to shareholders as dividends in the fourth quarter. It pays an annual dividend of $6.60 per share, which translates to a yield of 5.03% on the current market price, higher than its four-year dividend yield of 4.93%.
The company’s dividend payouts have grown at a CAGR of 2.2% over the past three years. The company has raised its dividends for 23 consecutive years.
Over the past five days, IBM’s stock has gained 1.2% to close its last trading session at $129.64. It has a 24-month beta of 0.61, indicating less volatility than the broader market.
Here are the factors that could influence IBM’s performance in the near term:
Recent Latest Developments
IBM and Cohesity announced a collaboration to address data security and resiliency challenges in hybrid cloud environments. IBM will launch its new IBM Storage Defender solution with Cohesity’s data protection as an integral part of the offering.
IBM Storage Defender will utilize artificial intelligence and event tracking on various storage systems, all accessible through a single interface to protect corporate data from cyber threats. Furthermore, the product will include cyber vault and clean room capabilities and automatic recovery functions.
On February 27, IBM’s Consulting segment announced the expansion of its Client Innovation Center (CIC) with the launch of its second Japan innovation hub in Cebu City to meet the growing needs of Japanese clients for Business Continuity Plan support, the increasing use of ISV/SasS, and the demand for more digital transformation professionals.
Moreover, on February 1, IBM and NASA's Marshall Space Flight Center announced a collaboration to use IBM's artificial intelligence (AI) technology to discover new insights in NASA's massive trove of Earth and geospatial science data. The partnership will apply AI foundation model technology to NASA's Earth-observing satellite data for the first time.
Solid Bottom-Line Growth
During the fourth quarter that ended December 31, 2022, IBM’s Software revenue increased 2.8% year-over-year to $7.29 billion. Its gross profit grew 1.4% year-over-year to $9.63 billion, while income from continuing operations grew 16.5% year-over-year to $2.87 billion.
The company’s net income and EPS were $2.71 billion and $2.96 billion, up 16.3% and 15.2% year-over-year, respectively.
Impressive Profitability
IBM’s trailing-12-month EBIT margin and EBITDA margin of 12.50% and 20.43% are 112.6% and 82.2% higher than their respective industry averages of 5.88% and 11.22%. Its trailing-12-month gross profit margin of 54% is 9.8% higher than the 49.19% industry average.
Moreover, the stock’s trailing-12-month ROCE and ROTC of 8.73% and 6.30% are 83.6% and 96.5% higher than their respective industry averages of 4.75% and 3.21%.
POWR Ratings
IBM has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. IBM has a B grade for growth, justified by solid financial performance in the latest quarter.
It also has a B grade for Quality, in sync with its impressive profit margins.
In the 80-stock Technology – Services industry, IBM is ranked #29.
Click here to see the additional POWR Ratings for IBM (Growth, Value, Momentum, Stability, and Sentiment).
Bottom Line
IBM's revenue for the fiscal year 2022 grew by 5.5% compared to the previous year, reaching $60.53 billion. This growth was attributed to the company's adoption of the "hybrid cloud" approach.
The company is also expanding its consulting segment due to the demand increase. Also, the company has paid dividends for 33 consecutive years, indicating a strong cash flow generation ability.
Given the company’s impressive profitability and the tech industry’s growth prospects, IBM might be an ideal pick now.
How Does International Business Machines Corporation (IBM) Stack up Against Its Peers?
While IBM has an overall POWR Rating of B, one might consider looking at its industry peers, Celestica Inc. (CLS), Serco Group plc (SCGPY), and NetScout Systems, Inc. (NTCT), which have an overall A (Strong Buy) rating.
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IBM shares were trading at $130.24 per share on Monday afternoon, up $0.60 (+0.46%). Year-to-date, IBM has declined -6.42%, versus a 5.91% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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