IBM – Attractive growth, unattractive valuation by TipRanks
© Reuters. IBM – Attractive growth, unattractive valuation
I am neutral on International Business Machines Corporation (NYSE :), because – if its dividend yield and the stability of its cash flows are attractive – the weak growth prospects of the company mean that its valuation is not particularly attractive for the moment.
International Business Machines Corporation is a global leader in computer hardware and software, delivering business innovations through an open cloud platform and artificial intelligence around the world since 1911.
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IBM the strengths of
IBM has an extremely strong brand heritage and offers a diverse range of core offerings including cloud computing, software, hardware and artificial intelligence in more than 170 countries. It employs more than 300,000 people worldwide and has a combined turnover of more than $ 70 billion. Strategic acquisitions and mergers with IT, technology, AI and consulting companies have strengthened IBM’s position in the competitive global marketplace, and it is consistently recognized as one of the best brands in the world.
IBM’s recent results
In its second quarterly report 2021, IBM announced revenue of $ 18.75 billion, exceeding analysts’ expectations of $ 18.29 billion. Its earnings per share were $ 2.33 versus expected EPS of $ 2.29. The company’s revenue grew 3% year-on-year in the second quarter of 2021, the fastest growing in the past three years, and the company expects it to continue growing for the rest. of the year.
Its Cloud and Cognitive Software business, which includes the acquisition of Red Hat by IBM, generated revenue of $ 6.10 billion, up 6% from consensus estimates of $ 5.93 billion. dollars. Its Global Business Services unit added $ 4.3 billion in revenue, a growth of nearly 12%. Systems revenue was $ 1.71 billion, down 7%.
In the second quarter of 2021, IBM spent $ 1.75 billion on acquisitions, the highest amount it has spent in a single quarter since closing the $ 34 billion deal with Red Hat in the third quarter of 2019. The company said it was acquiring myInvenio, a software company; Turbonomic, an application management company; and Waeg, a Salesforce (NYSE 🙂 consulting firm.
IBM also announced 2 nanometer chip technology and new AI capabilities for its Watson Studio software.
Following its better-than-expected results, IBM shares rose 4%. The company did not provide formal guidelines; however, management continues to expect revenues to increase throughout the year. He also expects adjusted free cash flow of between $ 11 billion and $ 12 billion for fiscal 2021.
IBM’s stock appears reasonably valued at this time, as its EV / EBITDA ratio and normalized price-to-earnings ratio both indicate that the stock is trading near its historical range. The EV / EBITDA ratio is currently 9.24x, compared to a 5-year average of 8.94x. The normalized price-to-earnings ratio is currently 12.40x, compared to its 5-year average of 11.03x. (See IBM stock charts on TipRanks)
The Taking of Wall Street
From Wall Street analysts, IBM obtains a moderate buy analyst consensus, based on 4 buy ratings, 6 hold ratings and 0 sell ratings in the past 3 months. Additionally, IBM’s average price target of $ 158.20 places the upside potential at 10.46%.
Summary and conclusions
IBM is a global information technology giant with a strong divide around its current revenue stream. However, the company has struggled to grow for an extended period and concerns remain about its competitive positioning in its growth businesses relative to tech giants like Microsoft (NASDAQ :), Oracle (NYSE :), Google (NASDAQ 🙂 and Amazon. (NASDAQ :).
That said, the price isn’t necessarily expensive – although it’s not particularly cheap either – so I think investors might want to wait for a pullback before initiating a position.
Disclosure: At the time of publication, Samuel Smith does not have a position in any of the titles mentioned in this article.
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