In the binary world of computing — where everything boils down to ones and zeros — you could conclude without much metaphor stretching that in the 1980s and into the ’90s, International Business Machines Corp. (ticker: IBM) was “The One.”
Small offices and big businesses lived and breathed Big Blue and its lovable “green screen” machines. In fact, when IBM introduced — you could say invented — the personal computer in 1981, tech experts concluded that nothing could stop them.
Yet in the years that followed, tech companies broke a lot of hearts and drained even more portfolios. Yahoo lost its search engine dominance to Alphabet’s Google ( GOOG, GOOGL), an upstart college project that began life as Backrub. AOL forged a horrible merger with Time Warner ( TWX). And IBM essentially stood by, it corporate mouth agape, as the market flooded with PC clones.
Meanwhile, Apple ( AAPL) poked fun at the company and unveiled sexy computers that were as much high fashion as high tech. It was enough that by 2005, IBM abandoned the PC marketplace — today worth an estimated $178 billion annually.
Thus The One became Big Zero.
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To be fair, IBM has looked to the future for some time and boasts an early-innings lead in artificial intelligence through its Watson platform — as well as in blockchain, the digital ledger technology that made bitcoin possible. Unlike the personal computer market — based on an easy-to-copy product — the unprecedented demand for new digital technologies demands massive research, development and deployment firepower. To that end, IBM is simply too well positioned to fade away.
“For years IBM has been considered a languid company, but now they’re truly starting to innovate,” says Kian Salehizadeh, senior analyst at Reality Shares, an asset management firm based in San Diego. “IBM’s front-running position in the blockchain space will be a key differentiator and inflection point to help revive the business.”
And its dividend remains strong. It has grown for 18 consecutive years and currently pays $1.57 cents quarterly, compared to 85 cents in the first quarter of 2013.
“IBM has always been a prominent dividend payer in the S&P 500,” Salehizadeh says. “As of March 31, IBM’s aggregate dividend payout ranked 18th out of all companies in the S&P 500. Historically, the stock has exhibited strong dividend growth and we foresee the same in the next 12 months.”
“We expect IBM to continue paying a high dividend but growth to slow to a sustainable 6 percent going forward,” says Benjamin C. Halliburton, chief investment officer with Tradition Capital Management in Summit, New Jersey. “The combination of organic revenue growth — which will start in second half of 2018 — and strong cash flow with the ability to buy back shares should allow IBM to grow faster than the market over the next five years.”
Still, investors have a right to worry. For starters, that languidness Salehizadeh talks about certainly applies to its stock price. Going back five years, IBM sold at $204 per share; today it fetches $144: a drop of almost a third. And while the stock market has enjoyed a very healthy run up over the last three years, IBM’s stock has barely moved the needle. In fact, it’s dropped slightly.
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“IBM faces an uphill battle with shareholders,” says Robert Johnson, principal of the Fed Policy Investment Research Group in Charlottesville, Virginia. “Notably, Warren Buffett’s Berkshire Hathaway ( BRK.A, BRK.B) has trimmed its holdings in IBM.
“The signal this sends to the market is large,” Johnson says. “Given that Mr. Buffett has indicated his preferred holding period is ‘forever,’ the decreased Berkshire commitment is doubly troubling.”
It’s fair to ask, then, that if IBM so badly mismanaged the very PC business it created, could it in turn get overrun by AI competitors? To be sure, IBM has 380,000 employees: larger than the total military force of Japan. But size could be just the problem. Today’s high-tech innovators are often small, work fast, iterate faster and get to market without friction.
Startups of that stripe probably have fewer employees than IBM’s graveyard-shift janitorial staff. But if Big Blue is a corporate Goliath, many of its competitors could become — as Apple once was — feisty little Davids, slingshots in hand.
Yet there is a counterargument that like attracts like and thus large attracts large. In March, the accounting firm KPMG announced that it would apply IBM Watson to its professional service offerings. That relationship should only grow, even as Watson does: The technology employs machine learning, which means that in a work milieu, Watson uses its experiences to educate itself. In this way, it can make better decisions, spot more anomalies and improve its efficiency.
That such a flowchart could apply to IBM as a whole seems to be the consensus of analyst firms. Four call the stock a “strong buy,” one a “buy” and 10 a “hold” — and none recommend selling.
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“IBM’s business appears to have finally bottomed and looks poised to start growing revenues and earnings in the near future,” says Halliburton, who adds that another reason to believe in IBM is its Z Mainframe technology. “Security is built into the Z mainframes, and security is in demand by customers — especially in financial services and health care, where IBM has strong verticals.”
So you could say that if things break IBM’s way, its failure of the PC ones and zeroes will give way to a success story, with Z as the new A-plus.
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IBM Stock Is at Computing’s Crossroads originally appeared on usnews.com
