IBM stock has been somewhat stagnant over the last couple of years for a number of reasons. A big factor is the fact that the company is attempting to move away from its hardware-based roots, and move towards areas of business with higher growth prospects.
While the company is off-loading its less profitable assets, it’s in gigantic learning curve, adapting to new technologies such as cloud computing, security, and mobile and analytics. It’s no secret that IBM has taken a major hit as cloud computing has negatively impacted the need for hardware-based services and associated software. SAS (software as a service) is on the rise, thereby pushing IBM out of the running as a leader in the industry.
That said, revenues have experienced a downfall with total sales taking a decline of 13% year over year during this last quarter. An important consideration however, is that currency headwinds and divested businesses also play a role here. After adjustments with these factors, sales actually fell only around the 1% mark.
On a more positive note, Analysts at Argus (an independent research firm) have recently upgraded from ‘hold’ to ‘buy’, for two reasons:
- Argus believes the financial performance of IBM could dramatically improve in the middle term.
- They believe that the current stock prices are considerably undervalued at their current prices.
As the company continues to dispose of lagging segments, the earnings quality is beginning to improve. As noted, identifying and implementing more strategic imperatives such as cloud computing are leading to potential acceleration.
One thing IBM has on its side – deep rooted connections to the industry, and the know-how that comes with being tenured in the business. CFO Martin Schroeter says “As we’ve said before, we are able to grow at a rate significantly faster than the market because of the industry perspective and deep insight we have from working with our clients on their core businesses to help move them to the strategic areas.”
The transformation IBM is undergoing is a work in progress, and things may get a tad worse before they get better, however the gains the company experienced in March of this year are a strong indicator that IBM is on its way back to the top.
The potential is high for IBM to rise but 20%. Price fluctuations notwithstanding, the Argus report seems fairly well grounded and predicts a considerable change that both performance and sales can and will improve through the middle term, which will lead to IBM stock being conveniently valued.
One thing is clear – investors will need to exercise patience as IBM completes the transformation from old school to a new and profitable leader in the tech industry.