IBM’s [IBM] share price has been powering down since the tech mainstay missed third quarter earnings. In the results, the company known as ‘Big Blue’ reported earnings of $2.52 a share, narrowly beating the forecasted $2.50. Revenue came in at $17.62 billion missing a forecasted $17.77 billion.
IBM CEO Arvind Krishna told analysts that the results had “fell short of our expectations” - not the kind of talk investors usually want to hear post-earnings.
For many, IBM lags other major tech firms in terms of innovation. Although that’s not to say it isn’t trying. If the firm can take full advantage of its focus on cloud computing, IBM’s share price could be worth a look. As could its infrastructure spin-off Kyndryl [KD].
Can a strategy change help IBM’s share price?
Since the firm reported disappointing third quarter results, IBM’s share price has been on the slide, dropping 13% since 20 October. However, investors might need to rethink how they evaluate Big Blue.
Under CEO Arvind Krishna IBM has sought to reposition itself as a cloud computing company. Part of that move has to spin off its bread-and-butter infrastructure business and main revenue generator into a separate company called Kyndryl - more on that below.
To build its cloud computing expertise IBM has invested heavily in acquisitions and research. Acquisitions include Red Hat and Turbonomic, while in the second quarter IBM invested $1.65bn in R&D. All of them expensive activities that have dented profitability, piled on debt and reduced the dividend.
“As IBM continues to consolidate and hone in on its true core business, a long runway of growth awaits it. With shares down almost 20% from all-time highs, we believe now is a perfect time to average down or initiate a position in this portfolio keeper” - North Pole Research in Seeking Alpha
Writing in Seeking Alpha North Pole Research reckons the recent declines in IBM’s share price, along with its efforts to reinvent itself, make it a Buy in the long-term. The argument is that investors need to rethink IBM and ‘can no longer look as if it is no-longer as a blue-chip dividend grower’.
“As IBM continues to consolidate and hone in on its true core business, a long runway of growth awaits it. With shares down almost 20% from all-time highs, we believe now is a perfect time to average down or initiate a position in this portfolio keeper.”
Joel Baglole writing on Investors Place takes a different view, suggesting that IBM will have to prove it can compete in the cloud computing and AI space before investors should give the stock the time of day.
“Until IBM manages to establish itself as a global leader in cloud computing and artificial intelligence, its stock is likely to continue struggling. Investors would be smart to pass on IBM stock for now. Revisit the company in a few months and see if its financials have improved at that point. Right now, IBM stock is not a buy.”
Clearly investors will have to do their homework before jumping in. IBM’s share price carries an average $148.48 target - hitting this would see a 28.9% upside on Friday’s close. For income seekers IBM boasts a decent 5.56% forward dividend yield.
IBM forward dividend yield
IBM offshoot Kyndryl could be a bargain
In October, IBM spun off its managed infrastructure offering under the brand Kyndryl Holdings [KD]. When it was a part of IBM, this area provided the behind the scenes software and support services to keep business systems running, including network design and cloud computing.
Kyndryl’s share price has slumped despite announcing several big name partnerships, reports The Motley Fool’s Anders Bylund. Bylund points out that its difficult to value Kyndryl as it hasn’t reported any earnings as yet, and even when it does update the market, the first few quarters are likely to be “burdened [by] expenses related to the spinoff transaction.”
Even so, Bylund thinks the stock is undervalued compared to the fundamentals, suggesting that bargain hunters might want to pick up the stock as a “price mismatch this large rarely lasts very long”. The stock isn’t exactly expensive having closed Friday at $16.32.
“... it seems obvious that Kyndryl's stock deserves to trade at a higher price level. The IBM operations that would later become Kyndryl reported $19.4 billion in revenue for 2020. You can pick up shares at the bargain-bin valuation of 0.22 times that sales figure. Even if revenues are shrinking quickly, that's too low,” writes Bylund
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