International Business Machines (NYSE:) is not the kind of technology stock that grabs the attention of investors. Unlike other blue-chip stocks, this 109-year-old company is struggling to revive growth and compete in an environment it has left far behind.
For context: IBM has a market cap of approximately $125 billion. That's a fraction of Apple's (NASDAQ:) $2.57 trillion, Microsoft's (NASDAQ:) $2.24 trillion and Amazon's (NASDAQ:) more than $1.7 trillion.
The main reason for this underperformance is that the past decade has been a lost decade for the software and services giant, as it remained irrelevant in the rapidly changing technology world, failed to innovate and lost ground to new entrants.
During Virginia Rometty's eight years at the helm, IBM proved dead money for investors. This was the decade when Amazon, Microsoft and Alphabet (NASDAQ:) all recovered as demand for computing power and applications soared.
But since she left last year, there are signs that Big Blue, as it is sometimes popularly known, is gaining ground. IBM's new management structure has improved the company's long-term growth prospects after many years of declining sales.
The New York-based company posted its largest revenue increase in three years in July, fueled by strong demand for cloud computing. These numbers helped IBM stock move 10% higher this year. It closed Tuesday at $138.06
Cloud Computing And AI
Arvind Krishna, who became CEO last April, focuses on artificial intelligence and the cloud to revive growth to blow in. Krishna has reorganized the company's operations around a hybrid cloud strategy, which allows customers to store data on private servers and across multiple public clouds. IBM completed the $33 billion purchase of Red Hat in 2019, the first step in a shift to what it calls hybrid cloud.
IBM is a safe dividend stock in our view, especially after the clear shift of the new management to cloud computing, a fast-growing company. These moves are encouraging and could unlock the value of IBM stock, which has increased its dividend for 26 years in a row.
The stock currently pays $1.64 per quarterly dividend, which translates to an annual dividend yield of 4.7%, making it one of the top-performing stocks among blue-chip companies.
Morgan Stanley, raising the price target from $152 to $164, said IBM's turnaround is on track due to better execution and stronger demand. In a recent note, the investment bank said:
"Increased quality of revenue, better macro trends and significant investments in talent, partnerships and go-to-market increase our confidence in accelerating growth in 2022."
Under Krishna's tenure, the company has made many acquisitions to accelerate growth. The company spent approximately $3 billion in the first half of this year to bolster its cloud and AI capabilities, including the purchase of Turbonomic Inc. and the Italian process mining company myInvenio. Recently, IBM bought Madrid-based Bluetab Solutions Group in an effort to expand its reach in Europe and Latin America.
In a separate note, Credit Suisse said strong second quarter results should help get the stock back on track.
In its note, Credit Suisse stated:
"We look to Kyndryl's planned 4Q spin-off as an important catalyst, facilitating the path to continued growth, supporting multiple future expansions."
Bottom Line
When it comes to growth, IBM has certainly disappointed its investors over the past decade. But after the acquisition of Red Hat and with new management, we see IBM slowly returning to growth. IBM's healthy balance sheet, manageable debt and a dividend yield of more than 5% make its stock a gamble worth considering, especially as the turnaround picks up momentum.
