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IBM and Red Hat

International Business Machines (IBM): Doing Better Than You Think

International Business Machines Corporation (IBM) released earnings today and IBM is doing better than you think. The maligned company unsurprisingly beat both revenue and earnings estimates. But the bar was low since the company has faced a declining top line for years due to an extended restructuring process that has taken years. These efforts were topped off by the 2019 purchase of Red Hat to accelerate the company’s transition to the cloud. Red Hat is now a part of IBM’s Cloud & Cognitive Services. Today, IBM has remade itself from a provider of information technology services and equipment to one focused on enterprise hybrid cloud.

The stock price reflects this lack of growth and low expectations. At a time when most tech companies are trading at elevated valuation multiples, IBM trades at a depressed one of ~10.8 prior to the earnings release. The stock is below its all-time high set in 2013 and is also trading below its 52-week high. Most investors are taking a wait and see attitude with IBM. Some like me have bought the stock due to the combination of low multiple, high yield, and growing dividend. But with that said, the jury was still out whether IBM’s transition to hybrid cloud will drive top line and bottom line growth.

Today’s earnings release was a positive one and provides patient investors with a glimmer of hope. Consensus estimates were for both revenue and earnings to decline. The surprise was that companywide revenue growth was positive albeit at only 0.1% year-over-year. This was due the strength of Red Hat and shipments of z15. Furthermore, IBM beat both adjusted and GAAP earnings per share by $0.02 and $0.03, respectively. The market reacted positively to the earnings release with a ~4% gain. Seemingly IBM’s Red Hat acquisition and the ongoing transition…

Disclosure: I am long IBM.

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3 thoughts on “International Business Machines (IBM): Doing Better Than You Think

  1. Hi Dividend Power, it’s Kanwal a fellow dividend blogger from Simply Investing. I’d like to send you a quick email for a blogging collaboration if you are interested, is there an email address I can use? Alternatively you can use my contact page on my site.

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