As the bear market mauls tech in general, one company that is doing surprisingly well is International Business Machines (IBM, Financial). This value name in technology is actually up 5% while the Nasdaq 100 index is down 30% year-to-date. This is a remarkable outperformance in this time period and speaks to IBM's value characteristics.
IBM began 2022 with good results. First-quarter revenues of $14.2 billion were nearly 6.7% higher than the prior-year quarter, or 11.7% after accounting for the divesture of Kyndryl (KD, Financial) in early November. Organic revenues were up 8%. The company achieved 70% revenue mix in software and consulting and $20.8 billion in hybrid cloud revenue on a trailing 12-month basis, up 17% year-over-year, which is a key metric the company is following.
The advance was driven by strong gains from the software and consulting segments. The software group benefited from good demand for hybrid cloud applications with revenue up 15%, while consulting saw big gains of 17%, particularly from the Red Hat business. Revenue declines at the infrastructure division hurt growth due to unfavorable product cycle dynamics in its zSystems (mainframe) division.
IBM laid out full-year 2022 expectations for mid-single digit revenue growth of 3.5% from incremental sales (excluding Kyndryl) and free cash flow of $10-$10.5 billion.
At a forward price-earnings ratio of 14.28 based on analysts' estimates for 2022 earnings per share, the stock appears to be modestly overvalued according to the GF Value chart. However, the company pays a solid dividend yield of 4.7%, helping to make up for the slight overvaluation.
The GF Score is mediocre at 70 out of 100. The GuruFocus ranking system gives the company solid rankings for momentum and profitabilty, but GF Value and financial strength are weak, and growth is almost nonexistant.
Below is a summary of selected metrics for IBM:
| Ticker | Company | CurrentPrice | GF Score | Market Cap($B) | FinancialStrength | ProfitabilityRank | GF ValueRank | GrowthRank | MomentumRank | Predictability Rank | ValuationRank | QualityRank | Probability of FinancialDistress (%) |
| IBM | International Business Machines Corp | $139.68 | 70 | 125.5 | 4 | 8 | 3 | 2 | 9 | 1/5 | 2 | 7 | 0.01 |
Overall, I expect IBM's software and consulting groups to continue to report good results, as they benefit from robust demand for hybrid cloud solutions. Profitability should continue to rise due to a shift toward higher-margin products and services. I see solid revenue and earnings growth next year. The significant investments in R&D should pay dividends in future years as more customers expand their hybrid cloud and AI capabilities, which is major area of focus for IBM.
IBM is better-positioned than most enterprise hardware and software companies to weather a macroeconomic downturn because only 20% of IBM’s revenue is tied directly to capital intensive hardware and related software, and more than half of its revenue is recurring.
Historically, IBM shares have been negatively correlated with PMI changes - in other words, the shares tend to perform better when economic growth is slowing,
IBM launched a new generation of mainframe computers this month, IBM Z16, which should drive growth in its hardware business for the next couple of years. The IBM Z16 system has AI accelerators directly built in as well as enhanced cybersecurity standards. Both of these features are of increasing importance to high end government and business customers who don't trust the large public cloud and want to maintain in-premise systems for their most vital data. IBM's hybrid cloud strategy caters to those customers.
IBM mainframes still power the majority of high volume transaction processing like credit cards, banks, insurance, etc. Most companies are loath to take the risk of migrating this critical task to the cloud and would rather upgrade their systems than risk a catastrophic IT project failure.
