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IBM - Things Are Changing

I have written positively about International Business Machines (NYSE:IBM) for some time on Seeking Alpha. In fact, I even included IBM in my Top 3 Dividend Growth Stocks for 2021. There are some readers who questioned my positive call. They rightly pointed out past mistakes by IBM, poor management, too much debt, debt-fueled share buybacks, and so on. There was even criticism of the acquisition of RedHat and the price that was paid. However, that was the past and things are changing for IBM. The most recent earnings release was the first growth in revenue (not accounting for currency effects) after four straight quarters of declines. In general, the latest quarter was much more positive as earnings per share was above consensus. Gross margins improved 120 bps. Three operating segments reported sales growth. Granted, IBM is still work in progress but seemingly IBM has hit an inflection point. It must still be determined if IBM can generate momentum and sustained growth with their hybrid cloud strategy in face of strong competition. However, I discuss below the reasons why I think IBM is long term buy.

Hybrid Cloud Is Gaining Traction

One of the major criticisms about IBM in the past decade was declining revenue and management’s inability to turn that around. For context, total revenue was $104,784 million in 2011 and $72,488 million in 2020. Simultaneously, operating income and net profit declined as well. Some of this was due to divestments of the hardware divisions. But in general IBM was not able to stop the trend of declining revenue as the nature of Information Technology changed with the growth of the cloud. IBM had cloud offerings but was seemingly focused on Watson and Cognitive applications. An interesting historical footnote was that Watson won on Jeopardy in early-2011 approximately when total revenue peaked…

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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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