Since the last time I wrote about IBM (IBM, Financial), Warren Buffett (Trades, Portfolio) is out, Steven Cohen (Trades, Portfolio) is out, Joel Greenblatt (Trades, Portfolio) is in, and Jim Simons (Trades, Portfolio) has reduced his stake to 1.5 million shares. The company’s stock, after a brief pop to $170 is back in the $140s.
Sometimes you have to take a step or two back before you can move forward again. That sums up what IBM has been doing financially over last five or six years, which has put it in a tough position.
2012
Revenue: $102 billion
Income: $16.6 billion
Shares: 1.15 billion
Book: 16.88
EPS: 14.37
Last 12 Months
Revenue: $80 billion
Income: $5.6 billion
Shares: 932 million
Book: 19.79
EPS: 6.10
It’s hard to imagine that IBM thought it would buy back close to 20% of its stock, over 220 million shares, and have a lower per-share figure six years out, but that’s what investors have to work with right now.
On the plus side, the company has consistently raised its dividend with share buybacks over the last decade. And, even if the payout ratio has approached 100%, it seems that IBM has confidence that it will retain the profitability it had in 2012 and 2013 when it earned more than $33 billion collectively. To do this, IBM must better monetize its Watson AI, which it seems to be doing in a variety of ways.
- Shutterstock is enlisting the help of IBM’s Watson AI technology to make it easier for customers to find images, videos and music tracks with over 200 million assets coming online in July through the Watson Content Hub that is designed to aid in the creation of websites and apps.
- The U.S. Department of Energy debuted its IBM supercomputer on June 8, saying that it is the fastest in the world, beating a Chinese computer that was in top place each of the last two years. The machine, dubbed Summit, can perform 200,000 trillion calculations per second, or 200 petaflops, is eight times more powerful than Cray’s Titan supercomputer, and nearly twice as fast than the Chinese supercomputer Sunway TaihuLight.
- Yesterday, IBM's Project Debater came up only slightly short in conjuring arguments that a human audience would find more persuasive, taking on two humans in a formal debate. This further shows that IBM is on the forefront of AI with its system venturing into subjective human territory following Watson’s crushing performance on Jeopardy in 2011, and Deep Blue’s win against chess grandmaster Garry Kasparov in 1997.
The general public might think that Moore’s Law happens organically. It doesn’t. Currently, it takes a lot of humans working hard to create new and better technology. AI is going to be a growth driver for every industry, just like the internet was, and while Apple has worked to put connected devices in everyone’s hand, IBM has been working on the underlying framework and the services that accompany it.
Remember, the past does not equal the future, and performance gains are not based on what the company did last year or 5 years ago, rather what they do going forward. Only time will tell if IBM’s current investments will pay off in deliverables that will pave the way for top and bottom-line growth.
In the meantime, the 4.3% dividend yield is strong enough to warrant a placeholder in a long-term portfolio. Over the next decade, that payout rate should continue to risen and it’s a good time to buy while the stock remains undervalued compared to other big tech giants.
Apple
P/S - 4x
P/E - 15x
P/B - 7x
P/CF - 14x
Alphabet
P/S - 7x
P/E - 26x
P/B - 5x
P/CF - 21x
Microsoft
P/S - 10x
P/E - 24x
P/B - 10x
P/CF - 18x
IBM
P/S - 2x
P/E - 10x
P/B - 7x
P/CF - 8x
It’s not a growth trade yet, but any resemblance of an uptick in financial results could create a rally in the stock back to $200 and beyond.
Disclosure: I am not long/short any stock mentioned in this article.
