IBM Stock Belongs On Your Watchlist After Latest Slide
IBM Stock Belongs On Your Watchlist After Latest Slide
Market volatility has stymied a recovery for IBM (NYSE:IBM) stock. As you may recall, back in December, when most tech stocks were trending lower, shares of IBM were soaring. The stock even held up well during the late January selloff. Yet with the big dive driven by Russia’s invasion of Ukraine, it pulled back. That brings us to a key question: Is IBM stock a buy?
Today, the tech giant trades for around $ 125 per share, versus the $ 135-$ 140 per share it was fetching in early January. But while many other names in the sector may have more room to fall before they’re in the buy zone, after its recent weakness, you may want to give this venerable name in the space a closer look.
Why? It may offer up the best of both worlds. On one hand, it’s a dividend stock with a low valuation. In today’s “risk-off” environment, it has far less downside risk. On the other hand, its middling performance notwithstanding, just meeting analyst expectations for earnings could result in a moderate-to-high rise in its stock price.
Simply put, those investors who are still skeptical about this so-called “dinosaur” could be in for a surprise. As the speculative frenzy keeps cooling down, and fundamentals come back in vogue, International Business Machines could perform well over the next twelve months.
The Latest With IBM Stock
Like I mentioned above, external factors have put pressure on shares in the company. The geopolitical crisis has had a direct impact on IBM’s operations, as it’s suspended all business in Russia.
While it hasn’t disclosed how much of its revenue comes from Russia, a look at its Russian revenue from past years suggests it isn’t materially affecting its operating performance. That said, as the conflict and the resultant sanctions could cause a recession in the U.S. and Europe, stocks across the board are under pressure.
A recession could also have an impact on IBM’s turnaround plans. As you may know, the company has divested its lower-margin, low-growth businesses (a smart move in hindsight). With a new focus on providing hybrid cloud services, “Big Blue,” under the leadership of CEO Arvind Krishna, is working to re-accelerate revenue and earnings growth.
Admittedly, this will be tough in a recessionary environment. Simply a slowdown in economic growth may be an issue. Either one could result in lower IT spending. In turn, that would be bad news for future results. Then again, you can argue that, with its latest slide, much of this uncertainty is already priced into IBM stock.
IBM’s Risk/Return Proposition Appears Favorable
I can understand why you may have reservations about jumping into IBM stock right now. But low expectations may already be baked into its valuation. And then some. For instance, the market is only pricing shares at 12.7x expected earnings ($ 9.86 per share) for 2022. This represents a jump of nearly 54% from what it reported for 2021 ($ 6.41 per share).
In short, the market is heavily discounting future results. If it falls short of expectations, it’s doubtful the stock has big downside risk from today’s prices. On the flipside, if it does manage to deliver results in line with expectations, then there may be a fair amount of room for multiple expansion.
If, in the months ahead, it manages to see its forward valuation rise, from 12.7x to, say, 15x, then that would take it up to around $ 148 per share. That’s 18% above today’s prices. A move to a 20x multiple, although more of a stretch goal, would result in a high return for this usually “slow and steady” stock.
Alongside this moderate upside potential, don’t forget IBM’s dividend. With a forward yield of 5.29%, and a 5-year average annual dividend growth rate of 3.7%, dividends will further boost returns, if you decide to make this a long-term position.
Bottom Line on IBM Stock
This may be more of a play for my more risk-conscious readers. But as the market continues to cycle out of the more high-flying names, even those with larger risk appetites may want to also consider IBM.
A stable 5.29% dividend is nothing to sneeze at. Neither are lower levels of downside risk, as a lot of pessimism remains factored into its stock price. Added to this is the potential for a substantial amount of price appreciation, if IBM manages to deliver results at, above, or even slightly under what the sell-side estimates.
Moving beyond just 2022, in the years ahead, the company could further prove that it’s not an “old hat” business in decline. Instead, with a new focus on higher-margin, higher-growth lines of business, it could return to prices not hit since the early 2010’s (prices nearing $ 200 per share).
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Published First on Investorplace here.
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