Some New Tricks Are Working Well for IBM – InvestorPlace

If you believe that an old dog can learn new tricks, then as an investor you’ve got to be thinking about International Business Machines (NYSE:IBM) stock these days.

Photo of IBM (IBM) building as seen through the canopy of a tree. IBM logo is in large letters on side of building.

Source: shutterstock.com/LCV

IBM traces its history back more than 100 years, to 1911. Known by its nickname “Big Blue,” IBM invented floppy disks and hard disks, ATM machines, barcodes and magnetic stripes on credit cards.

It was also responsible for computer innovations like SQL programming language. And its mainframe was the No. 1 computer platform of the 1960s and 1970s.

Those are great accomplishments, but today IBM is nowhere near one of the top computer companies in the world. It still makes and sells computer hardware and software, but nowadays it has a hand in cloud computing and data analytics.

It’s also known as a key research hub. Last year, for instance, in rolled out what it calls the world’s smallest and most powerful microchip. It says the ultradense chip could one day quadruple the battery life in smartphones.

Now sporting a market cap of nearly $118 billion, IBM stock trades significantly below its all-time high. But the stock is doing better these days than you might think for a 101-year-old tech company.

IBM Stock at a Glance

Tech stocks are having a bad 2022, but you wouldn’t really know that from IBM. The company’s stock is down less than 2% so far this year.

That’s better than the Dow Jones Industrial Average, which is down more than 4%. And its substantially outperforming the tech-heavy Nasdaq composite, which is down more than 8% since Jan. 1.

Pulling back a bit and you’ll see that IBM stock is down 1% over the last six months. And on the trailing 12-month basis, IBM is up about 2%.

So, why is IBM outperforming the market so far in 2022?

Part of the reason is a strategic spinoff of some legacy assets. In November, IBM split into two, retaining the most profitable, growth-oriented segments under the IBM umbrella – things like cloud computing, AI, blockchain and data security.

Meanwhile, IBM’s infrastructure services business that makes information technology systems spun off into a new company, called Kyndryl Holdings (NYSE:KD). Kyndryl has a funky name with a funky spelling, but this is where IBM’s core legacy business is housed.

How’s that working out for KD? Not so hot. Krndryl stock is down nearly 70% since the November spinoff, including 26% so far in 2022.

IBM Today

IBM CEO Arvind Krishna used to be in charge of the company’s cloud division. It’s a good thing he’s got the top job now, because cloud computing should be a source of strength for IBM stock in the coming quarters.

Market research firm ITCandor says that IBM has particular strength in the infrastructure-as-a-service (IaaS) and platform-as-a-service (Paas) segments. In those areas, IBM has 15% of the vendor revenue market, trailing only Amazon (NASDAQ:AMZN). It’s beating major cloud companies like Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOG, GOOGL), and Alibaba (NYSE:BABA).

IBM also saw 16% growth in its fourth-quarter earnings report of hybrid-cloud revenue. The hybrid cloud allows applications to run in a combination of environments. It’s becoming more essential because few companies rely entirely on public cloud services.

Overall, IBM reported year-over-year growth of 6% in the fourth quarter. Revenue of $16.7 billion beat analysts’ expectations of $15.96 billion. And earnings of $3.35 per share beat the $3,30 EPS that analysts had predicted.

“We increased revenue in the fourth quarter with hybrid cloud adoption driving growth in software and consulting,” Krishna said. “Our fourth-quarter results give us confidence in our ability to deliver our objectives of sustained mid-single digit revenue growth and strong free cash flow in 2022.”

The Bottom Line

IBM stock is a rare legacy tech company that figured out a completely different way to do business to remain relevant. The inventor of the floppy disk shed its legacy segments to focus on ways to compete today and in the future.

And the company is providing returns to shareholders. Even though the stock growth may be a disappointment (but keep in mind it’s better than the market so far this year), IBM is a solid dividend play.

Last year, IBM joined the ranks of dividend aristocrats, which are those select companies that increased their dividend yield for 25 consecutive years. IBM offers a 5% yield these days, which is light-years better than the average tech company yield of 1.37%.

Are there better tech stocks out there than IBM? Surely, yes. But IBM stock deserves some respect and attention, even in 2022.

On the date of publication, Patrick Sanders did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders.

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