Old tech firm IBM besting hot stocks amid its advances
One of the oldest companies in tech has been trouncing some of the hottest stocks on Wall Street.
Shares of International Business Machines Corp. are about 6% below an all-time high as investors expect a turnaround is finally bearing fruit after years of tepid growth and share-price returns. Compared to the Magnificent Seven, IBM’s roughly 19% gain this year, including dividends, trails only Nvidia Corp. and Meta Platforms Inc.
“IBM has been discounted by the rest of the industry, but it has made a lot of investments in both cloud and AI, and with a strong AI business, we could see growth inflecting higher,” said Jethro Townsend, portfolio manager at Nia Impact Capital. He cites the firm’s cash flow generation and “healthy” dividend yield as factors that provide room for it to re-rate higher.
Much of the year’s advance followed IBM’s results in late January, when it gave a better-than-expected forecast for both free cash flow and revenue and said it was seeing growing demand for its artificial intelligence products. The company has also cut jobs and expects to pause hiring for roles that could be replaced with artificial intelligence technology, which is seen as a potential tailwind for margins.
The surge is a recent phenomenon, however; while Apple Inc. has lagged this year, its five-year total return of 275% is much stronger than IBM’s 82% gain over the same period.
Wall Street remains divided, with bulls outnumbered by skeptics and bears, according to data compiled by Bloomberg. While it looks cheaper relative to most bigtech stocks, IBM’s multiple of 19 times estimated earnings is near its highest in 20 years. The stock is 4% over the average price target, among the worst return potentials among components of the S&P 500 tech index.
Still, the company offers
“IBM has been discounted by the rest of the industry, but it has made a lot of investments in both cloud and AI, and with a strong AI business, we could see growth inflecting higher,” said Jethro Townsend, portfolio manager at Nia Impact Capital. He cites the firm’s cash flow generation and “healthy” dividend yield as factors that provide room for it to re-rate higher.
something that is something of a rarity among big tech: a robust dividend. The indicated yield is 3.43%, well above others in the sector. The indicated yields for Apple Inc. and Microsoft Corp. are below 1%, and while Nvidia pays a dividend, the yield is essentially non-existent.
“The CEO has done a heroic job in starting to turn the company around, but it is just generally slower growth, and not cheap enough to be enticing,” said David Katz, chief investment officer at Matrix Asset Advisors.
IBM shares rose 63 cents, or 0.33%, to close Wednesday at $193.97.