IBM beat all its large-cap tech peers in 2022 as investors shunned growth for safety

IBM is not typically described as a scorching firm. But in a yr that noticed traders abandon all main tech shares, Big Blue was within the inexperienced.

The Nasdaq is closing out its worst yr since 2008. High gasoline costs, hovering inflation and the Federal Reserve’s regular tempo of fee will increase have punished progress shares and favored extra mature, much less risky names which might be seen as extra recession-resistant.

Tech names that thrived throughout the Covid days suffered probably the most because the economic system reopened and customers returned to a lot of their outdated habits.

Among U.S. tech firms valued at $50 billion or extra, IBM was considered one of solely two to generate constructive returns in 2022. As of Friday’s shut, the inventory was up 6% for the yr. The different gainer is VMware, which is up 5% as a result of it agreed in May to be acquired by Broadcom for $61 billion.

While Meta, Amazon and Tesla have been pummeled, traders turned to 111-year-old IBM, betting on its steady earnings, alongside vitality shares corresponding to Exxon Mobil, health-care names together with Merck and industrials Northrop Grumman and Lockheed Martin.

IBM is “trading well above its historical range,” Bernstein Research analysts wrote in a Dec. 20 observe to purchasers. The agency has a maintain ranking on the inventory.

Nobody will mistake IBM for a progress inventory. Expansion is persistently within the single digits, and final yr the corporate spun off Kyndryl, its managed infrastructure providers business, right into a separate publicly traded entity. That minimize head rely by about 90,000.

But IBM generated $752 million in free money movement within the newest quarter, up 25% from a yr earlier, and paid out $1.5 billion in dividends. Third-quarter earnings and income each topped estimates, and the corporate raised its forecast for the total yr.

Crawford Investment Counsel in Atlanta, which focuses on revenue and dividends, checked out IBM in 2016 and concluded that it could be too early for a significant funding, stated Aaron Foresman, an fairness analyst on the agency.

Crawford’s thesis modified in 2019, after IBM purchased faster-growing Red Hat for $34 billion. The agency, which at the moment has $6.7 billion below administration, boosted its IBM stake from $2 million to $30 million and saved shopping for till its holdings reached $109 million.

IBM took a hybrid strategy to the cloud below CEO Arvind Krishna, who succeeded Ginni Rometty on the helm in 2020. After struggling to realize scale as a cloud infrastructure supplier, the corporate wager that enterprises would use on-premises information heart infrastructure in addition to the general public cloud, relatively than relying totally on one strategy or the opposite.

“Three years later, it’s much closer to their vision than everything on public cloud,” Foresman stated. His agency bought 3% of its shares within the second and third quarter of this yr.

Consulting stays an enormous a part of IBM’s business, accounting for one-third of income. In that realm, IBM companions with the massive cloud suppliers, relatively than strictly competing with them. The firm has a backlog of business with Microsoft price greater than $1 billion, and a fair larger one with Amazon, Krishna stated in a dialog with RBC CEO Dave McKay in November.

IBM additionally made technological advances in 2022, introducing the z16 mainframe pc. When a brand new mainframe hits, many purchasers improve. That results in larger {hardware} income and extremely worthwhile transaction processing software program to run on the machines. IBM’s prior mainframe increase cycle began in September 2019.

While IBM stayed away from any splashy high-priced acquisitions this yr, it introduced some smaller offers to boost sure capabilities. Earlier this month, IBM agreed to purchase Octo, a consulting firm based mostly in Virginia that targets authorities companies. Terms weren’t disclosed. It additionally absorbed consulting firms Dialexa and Sentaca this yr.

Foresman described the purchases as an acceptable use of capital and “so small that they’re not necessarily disclosing transaction multiples.”

Still, Krishna acknowledges that the financial backdrop is not ultimate. He stated in October that larger costs have led to “some caution creeping into the conversations” in Europe, the place the corporate has to arrange for a downturn. In the Americas, the place IBM will get about 53% of income, the business local weather is “very robust,” he stated.

The Bernstein analysts stated the inventory’s path from right here may merely experience on the state of the economic system, relatively than any main catalyst inside the corporate.

“Given its defensive characteristics and historical performance, we believe that IBM is likely to fare well if we continue to have pressured markets, and likely to lag major indices if we enter a recovery period,” they wrote.

IBM’s mannequin via 2024 requires mid-single-digit income progress, translating into free money movement progress within the excessive single digits.

That’s adequate for traders who search for security of their fairness bets.

“Combined with mid-single-digit revenue growth, a couple points better than that on EPS and a 5% dividend yield is — you know, that’s not a home run, but it’s well within our expectations for what we’re trying to accomplish,” Foresman stated.

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