IBM stocks: is it worth investing in them?16 / 03 / 22 Visitors: 385
Like the major oil companies, the company has been integrating horizontally and vertically throughout its entire IT product development cycle. Implementing horizontal integration, IBM sold products and services in the areas of hardware (computer hardware) and software (software). Through vertical integration, IBM produced its own computer components. Strategically, they were sold directly to the end consumer.
But since the 2000s, IBM has struggled to keep up with changes in IT. The golden age of hardware manufacturing (servers, PCs, networking, storage) is over and is now in decline.
Lagging behind competitors in key segments such as cloud computing, artificial intelligence, IoT (Internet of Things) negatively affects its brand. The dynamics of the IBM stock price since 2012 does not inspire optimism. Investors fear that the transformation of its business model is doomed to failure.
In short, investing in IBM stock does not attract crowds of traders. Now it is considered a second-class technology company. But is that reason enough not to invest in Big Blue?
We will find out the answer to this question by carefully analyzing the American company. Such analysis includes company history, company performance, share price history, financial analysis, dividend information, and opportunities and risks.
IBM stock: The history of IBM
The name IBM is often associated with Thomas Watson, but in fact he is not at the origin of the creation of the American company. In fact, IBM was the result of a merger of several companies led by Charles Ranlett Flint, which resulted in the founding of CTR (Computing-Tabulating-Recording Company) on June 16, 1911. On February 14, 1924, CTR was renamed International Business Machines Corporation (IBM).
After making a fortune in the 1930s, in the 1950s IBM developed the large 20 cubic meter IBM 701 computerized system, thus ushering in the computer age.
Subsequently, the American company will release similar models such as the IBM 702 and 650, a hard drive, a computer programming language, Fortran, and the OS/360 operating system.
The high cost of computers and their size prompted IBM to offer them for rent to its customers.
In the 1970s, IBM was a leader in the IT industry and was the world's largest company by market capitalization. During this period, Big Blue releases the IBM 5100 minicomputer and the first personal computer, as well as the IBM 3800 laser printer. However, falling prices associated with the huge supply of personal computers forces IBM to abandon its rental model and start selling its own models.
It was in the 1980s and 1990s that IBM gradually lost its leadership in information technology. On the one hand, the advent of the personal computer suggests that sales will go through intermediaries before reaching the final consumer. On the other hand, the loss of the monopoly on the PC, due to the fact that the OS / 2 operating system was not widely accepted in the market and its release was stopped, brought her huge losses.
With the development of the Internet in the 2000s, IBM began to focus on providing services at the expense of developing hardware. The American company, however, manages to regularly increase turnover until 2010, but after that it faces the harsh reality of the technology sector, where today's winners may be tomorrow's losers.
Its strategic focus on cloud computing and artificial intelligence was not actually perceived by the market. During the 2010s, IBM focused on its GBS (Global Business Services) and GTS (Global Technology Services) organizations, but investors did not see this positive moment. As a result, IBM's share price was hit hard despite excellent dividend results.
IBM shares: IBM activities
IBM's activities have expanded significantly since the founding of the company. In the 1990s, IBM moved from manufacturing large systems to small hardware systems. This transition was relatively successful as the "blue giant" failed to popularize its OS/2 operating system.
Since the 2000s, lBM has shifted its focus more and more towards services, which account for 60% of its revenue thanks to the GBS and GTS divisions.
GBS activities include consulting activities, application management, cloud computing and helping companies with digital transformation. This is a fast growing division.
The Red Hat acquisition was the key that IBM needed to gain market share.
GTS is a profitable division that includes outsourcing and maintenance services, but its popularity is declining due to high demand for public and hybrid cloud technologies.
In addition, IBM abandoned activities that had become strategically inappropriate: networking at Cisco, x86 servers and PCs at Lenovo, software at HCL.
The habit of questioning its business model forced IBM to split its business into two separate parts in October 2020. One of them has retained the name of IBM and the rapid growth of activities. The other is temporarily called NewCo with reduced operations, outsourcing and maintenance.
The purpose of this separation is to separate the kind of activity that hinders the real growth of Big Blue. Obviously, the American company wants to focus on the possibilities of cloud computing and artificial intelligence.
At the moment, IBM's business revolves around five areas of activity:
- GBS (22% of turnover)
- GTS (35% of turnover)
- Cloud and cognitive computing (32% of turnover)
- Production of equipment (9.5% of turnover)
- IBM Global Financing (1.5% of turnover)
At the same time, America brings 46.4% of its income, Europe / Middle East / Africa and the Asia-Pacific region 32.1 and 21.5%, respectively.
IBM stock: IBM competitors
Each IBM enterprise is in fierce competition for market share, where the main thing is innovation.
Let's start with the most important activities for the blue giant. In the field of cloud computing, which has great potential for growth, the main competitors are Amazon, Microsoft, Alphabet, Alibaba, Salesforce, Tencent and Oracle.
In hardware, IBM competes with Dell, HP, and Xerox. In outsourcing and IT infrastructure, IBM is competing with Accenture, Hewlett Packard, Wipro Technologies and Capgemini.
IBM shares and company shareholders
Warren Buffett, who owns Berkshire Hathaway, was IBM's largest shareholder in 2011. Seven years later, he sold most of the company's shares and invested in Apple.
Today, IBM's majority shareholders are primarily asset management companies that have set up mutual funds. The top three shareholders are Vanguard Group, State Street and Blackrock with 7.8%, 5.8% and 5.6% respectively.
We also note the state pension fund of Norway, which owns 1.2% of the capital.
IBM share price history
IBM stock has experienced two golden periods since the fall of the Berlin Wall, one of the key moments of globalization.
The first golden period began in August 1993 and ended in July 1999, when the share price rose by 1,268%. Then by October 2002, the American company lost more than 60% due to the bursting of the dot-com bubble.
It was in October 2002 that the second golden period of IBM began, coinciding with the transformation of the direction of its work towards services. It is divided into two stages: the first - from October 2002 to July 2008, before the onset of the mortgage crisis.
However, the share price quickly recovered after falling 47% in a few months. The second period was from November 2008 to March 2013, during which growth was about 213%, and record highs were set at $215.9 in March 2013.
Since hitting a historic peak in March 2013, IBM's stock has changed drastically due to the decline in its outsourcing, service and systems activities, which negatively affected its growth in cloud computing and artificial intelligence.
While Big Blue has a presence in both high-potential markets, its market share remains negligible compared to Amazon, Microsoft, Alphabet and Alibaba. IBM is not the number one choice for clients looking to invest in digital transformation.
For seven years (from March 2013 to March 2000), stocks were in a strong bear trend as their market capitalization fell by 58%, regularly making lower highs and higher lows.
During the worst of the Covid-19 crisis, the NYSE-listed IBM stock price fell below $100 for the first time since July 2009. Since reaching the lows in March 2020, the price has recovered sharply and reached key levels, after which there was a trend reversal.
Dividends on IBM shares
If there's one thing that can interest investors in IBM, it's its performance. As of April 29, 2021, it is averaging 4.4% over the past five years, which is rare in the tech industry. In addition, Big Blue has paid growing dividends for the twenty-fifth year in a row and is part of a small circle of dividend aristocrats.
However, the growth of IBM's dividend hides the difficulties of the 2010s. Its strong performance is a reflection of the stock's negative performance during this period.
All things considered, should we be concerned about the reliability of IBM's dividend payout despite its status as a dividend aristocrat?
The division of IBM, announced in October 2020, is a consequence of the fall in its turnover and profit since 2012. Changes in the business model over the past decades have contributed to the loss of authenticity in its branding and "investor uncertainty about its growth prospects."
When profitability is virtually non-existent for several years, revenues fall rapidly. To catch up with its competitors in cloud computing and artificial intelligence, IBM had to run into debt. In the short term, the company's debt ratio can be a concern. Debt/EBITDA and Debt/free cash flow ratios are 3.7 and 3.4, respectively.
These figures are quite high compared to the market average. The interest rate coverage ratio has steadily declined each year, currently standing at 7.77. The debt/equity ratio is 284%.
In addition to debt, the company's dividend payout ratio is at 104%, while the limit that cannot be exceeded is around 70-80%.
Fortunately, IBM was able to successfully control its operating costs and retained a significant level of cash. A free cash flow per share of $14.13 compared to a dividend per share of $6.51 in 2020 speaks to IBM's margin of safety to pay dividends to its shareholders.
IBM shares: risks and opportunities
Having lost its competitive advantage in the 2000s, IBM is no longer the benchmark among IT companies. Faced with serious competitors, Big Blue weakened financially. Growing dividends and being a dividend aristocrat are not enough to attract investors.
When it comes to cloud computing and artificial intelligence, investors prefer to invest in Amazon, Microsoft and Alphabet. In this way, they diversify their investments into very promising long-term directions.
By dividing its operations in two, IBM has given itself one last chance to rewrite great history. She no longer has the right to make mistakes.
Everything points to a very negative view of IBM stock at a fundamental level, with the IBM price chart showing a strong downtrend since March 2013. However, the blue giant is showing some signs of hope for long-term investors.
On the one hand, the American company was able to increase the size of its dividends during the crisis in 2020. On the other hand, its stock price is moving sideways against the March 2013 downtrend line. If IBM shares manage to break the line up in the coming weeks or months, this could attract new investor flows.
Situations where no one wants to buy stocks are often great investment opportunities.
Finally, if you're dealing with a company like IBM, dividends will be credited to your account if you're long, but you pay if you're short.