For decades, IBM (NYSE: IBM) has been a reliable, slow-growth addition to millions of Americans investment portfolios.
Yet Big Blue’s stock is mired in somewhat of a slump lately, standing at less than $170 per share (although providing a nice 3.7 percent dividend) as IBM watchers continue to bemoan the technology giant’s so-called growth problem.
While IBM’s share price is showing signs of life, its long-term track record is another story. In the past five years, the company’s share price has declined by 13 percent. Additionally, IBM reported a 4 percent uptick in annual sales growth in the fourth quarter of 2017. That’s good news, until you know that it’s the company’s first quarter of plus-growth since 2012 — a 22-quarter drought.
Still, there is at least some evidence that IBM has turned the corner, with revenue generation of $22.5 billion in the fourth quarter of 2017, against estimated analyst revenue of $22.1 billion. IBM’s strategic initiative philosophy, where it dives deeper into the lucrative (but combative) cloud computing and “big data” analytics markets, could be paying off, as the company launches a spearhead into the blockchain distributed ledger computing space.
[See: 7 of the Best Stocks to Buy for 2018.]
But is a new business philosophy the entire story as IBM heads into a new year? Not entirely, market watchers say.
Where is IBM stock headed? “At current valuations, IBM is a very attractive stock,” says Vahan Janigian, a portfolio manager for Interactive Brokers Asset Management, a Boston-based online investing company, and CIO of Greenwich Wealth. “The company has strong cash flows, strong earnings and a generous dividend. The only thing it lacks is growth. Growth plummeted because management was slow to recognize and exploit high-growth opportunities. But that seems to be changing.”
Janigian views both the cloud computing and data analytics sectors as “high-growth” areas for IBM. “These initiatives now account for almost half of the company’s overall revenues and they helped IBM post year-over-year revenue growth for the first time in 23 quarters,” he says.
That said, IBM’s management has a lot of making up to do before convincing investors that it’s finally on the right track.
“Clearly, investors have been frustrated with the stock’s poor performance, especially as the shares of other technology stocks have soared,” Janigian says. “In addition to being slow to recognize growth opportunities, management spent too much money buying back shares when the price was still relatively dear.”
“In hindsight, they should have waited until the price fell,” he says. “IBM also suffered with employee turnover as some of the best employees moved on to better opportunities.”
[Read: The Best Bitcoin Wallet of 2018.]
One area of growth potential is blockchain, and IBM is already plugging into the emerging distributed ledger technology that’s been driving the cryptocurrency craze around the globe.
“In recent years, IBM has pivoted hard from hardware and general purpose consulting to laser focus on IBM Watson,” says Scott Amyx, founder of New York-based Amyx Ventures and a global expert in blockchain technology. “As part of that initiative, the company is looking to drive the business towards exponential technologies, like artificial intelligence, Internet of Things (IoT), blockchain, security and quantum computing. Any authority in IoT would tell you that blockchain is not only suitable but almost mandatory to consider in a decentralized, networked IoT world.”
IBM focuses on blockchain. Amyx says IBM is “forging ahead aggressively” with its blockchain offering, especially to enterprise and government clients. “Due to the sophistication and complexity, for the foreseeable several years, enterprises will lean on IBM and others to help implement blockchain into their processes, especially where authentication and trust are critical,” he says. “Those areas could include gold, diamonds, chocolate, collectibles to smart contracts and back-end reconciliations.”
Some of these IBM initiatives are long-term bets, Amyx says, and Wall Street “may not boost the stock until there are tangible lifts from these new business lines.”
Overall, Wall Street wealth managers see IBM trending upward in 2018, even as it takes time for its blockchain initiative to bear fruit.
“I expect the shares to rally from current levels,” Janigian says. “Management projects operating earnings of $13.80 per share for 2018. If we see growth (even marginal growth) in the first or second quarters, it would be reasonable to expect IBM to sell for 14 to 15 times 2018 expected earnings.”
“That would give the stock a price target of more than $190 per share by year-end,” he adds. “I think $180 per share in six months is perfectly reasonable.”
IBM’s robust dividend picture and recent sales growth are also attractive, says Eric Ervin, chief executive officer at Reality Shares, a San Diego-based asset management firm.
“IBM is one of the healthier dividend-growing, large-cap stocks, and it has strong potential to continue increasing its dividend on a forward-looking basis,” he says. “For the first time in 20-plus quarters, the company just reported positive revenue growth, and the company is undervalued with better earnings quality compared to its peers.”
[See: 7 of the Best Dividend Stocks to Buy for 2018.]
The final word on IBM stock. For IBM investors, slow growth is translating into somewhat faster growth in early 2018, with the possibility of better things to come with the company’s new cloud, data and blockchain strategic initiatives.
With a little patience, IBM investors may view 2018 as a good year to hang on to “Big Blue”. After all, it certainly can’t be much worse than the last few years.
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IBM May Get a Big Boost From Blockchain originally appeared on usnews.com
