Is IBM valued as a consulting company or as a Tech Co

[anitya]

Its dividend yield is 4% while its trailing P/E is 21.  Tech sector P/E is huge and div yield is puny relative to IBM's.  I think IBM metrics stack up favorably even against non-tech S&P 500.  However, from a quick review, it appears its earnings are a bit trendless (or unpredictable).


Also noticed that compared to five years ago, 40% fewer analysts cover this stock now.  Is that an indication of market apathy (lower demand for the stock)?  Not suggesting a definite cause and effect relationship but perhaps, the lower pricing relative to other tech companies is justified. 

Is IBM being valued as a consulting company rather than as a Tech company or is it simply mispriced and cheap at the current levels?


I did not see anything to suggest that its dividends are at risk at all.   If one is not anticipating a recession, may be one buys / owns IBM simply for its dividends and treat the price appreciation as gravy.  If making a fresh purchase, not sure there should be any rush to buy before the next earnings release on Jan 24.

uncleharley mention of IBM prompted the above but would like everyone's input.  

[racqueteer]

IBM was once primarily a company which sold hardware and provided business software; while performing cutting-edge research. They were fat, happy, wasteful (imo), and squandered any number of opportunities to dominate in multiple areas. Now it's more a support and solutions house which happens to sell hardware. I'm not even sure about the 'research' end of things any more. They DO seem to run a tighter ship.

[FD1000]

www.fool.com/investing/2023/12/20/ibm-will-get-a-revenue-boost-in-2024/


At the end of 2022, 45 of the world's top 50 banks used IBM's mainframe systems. Once every two and half years or so, IBM launches a new lineup of mainframes. The latest iteration, the z16, was announced in April 2022 and became available the following month...The heavy usage of code written in COBOL is a problem for companies that are dependent on that code. COBOL isn't really taught anymore, so the pool of software engineers capable of maintaining those applications is shrinking. This situation is bad news for IBM because it could compel some customers to move away from mainframes....After years of waffling between revenue growth and revenue declines, IBM is now in a good position to grow consistently, barring a severe economic downturn. The company is settling into its role of providing platforms, software, and consulting services to enterprises looking to modernize their IT infrastructures and adopt artificial intelligence technology. The mainframe itself isn't a growth business like hybrid cloud and AI, but it plays a role in both.



IBM expects to increase revenue by 3% to 5% this year excluding the impact of currency.

================

The above is funny to me, I worked over 25 years in mainframe and Cobol. I could not find a Cobol job since 2010 but I read many times there is a shortage.
MSFT, a much bigger company expects to increase revenue by 14.8%. Am I missing something?

[anitya]

3 to 5% revenue growth does not seem like deserving typical Tech valuation. Q4 2022 EPS was $3.6 and the consensus estimate for Q4 2023 is $3.76. That is less than 5% increase in EPS, which means likely less than 5% revenue growth. Barely keeping up with inflation?

[uncleharley]

IBM could be best described or labeled as an Info Tech Conglomerate. I hold my position in my IRA as a long-term investment and reinvest the dividends as they come in. It provides some needed diversification to my CEF heavy IRA. Its size and customer base makes it considerably different from a typical Tech investment.

[kathiel]

Info Tech Conglomerate (as per uncleharley) seems like a good description. And don't forget IBM was a pioneer in AI. IBM has done well in the last few years, and the dividend is good. I have about 5% of my retirement portfolio in IBM, another 5% in Apple.

[yogibearbull]

IBM used to be a calculator company, but it became great by taking the lead in computers by trashing innovators and all-comers. Its great sauce was hardware bundled with software (both operating and application), and that when the software business didn't even exist. Then, it became a camel designed by the DOJ that forced it to unbundle - separate the hardware and software sides. It missed 1.5 revolutions - the Minis and Micro/PCs (well, it was half-heartedly in it, basically setup Bill Gates at unknown Microsoft/MSFT, but finally dumped PCs because its profits couldn't compete with the mainframe cash cow). You may have heard that mainframes are dead and old technology, but for IBM, it remains a shrinking but very profitable business, still its golden goose. Along the way came many CEOs, and one of them was like a movie plot - an exec from real "chips" company - RJR branded cookies, and he put lot of old IBM stuff under a jackhammer. So, now, it is a tech conglomerate - doing lots of things (even AI) but none exceptionally well. Yield 4%, fwd P/E 16.75, market-cap $151 billion.  finance.yahoo.com/quote/IBM/key-statistics?p=IBM

[anitya]

Is IBM the Pfizer of Tech industry, except IBM recent chart is a lot encouraging?

[kathiel]

anitya, could be!

[bb2]

Funny. IBM = Pfizer. It fits. "Mainframe" is mentioned 2 times in the last 10-k, once in the last Q. AI hype accounts for the last bump.
Officially, IBM Sector is "Technology" and Industry is "IT Services & Consulting".
Revs are up up a bit each year from a 2020 low of $54B. 2023 - 60B revs, . Was $96B in 2013.
Software, 21B and consulting, 19B are pretty evenly divided. Infrastructure at 4.5B. Growth is mid single digits. 5.6% for consulting. 7.8 for software.

Just seems to me there's plenty of competition for IBM. (I used to know the 360 mainframe assembler very well. Loved my yellow book. Those were the days for IBM.  The saying was, "Nobody ever gets fired for choosing IBM.")

I sold around $190 years ago. Was reading something from MIT just today - quantum won't be a thing for another 10 years.  Also, not all AI is the same.  WatsonX is supposed to be generative but I've not looked into it.

[bb2]

Been reading about IBM's cloud offerings and vs. Amazon. IBM was considered "niche" by Gartner in 2022. A couple years ago, I talked to an IT guy with a massive company, who told me AWS was really the only way to go.

Also:
"The market analyst notes the breadth of functionality, its prosperous ecosystem, and its market share – twice that of Microsoft – as significant strengths for AWS.

Meanwhile, Gartner highlights IBM’s focused strategy on regulated industries, vision for modernizing enterprise workloads, and container management software as its most prominent plus points."

Stodgy IBM seems to attract stodgy customers.

Div is considered safe but it's a 70% payout ratio, which seems high for a tech company needing to spend to be competitive.

[anitya]

bb2 , Thanks.

MSFT debt is slightly higher than 1 times operating cash flows. IBM debt is about 5 times operating cash flows. For consulting comp, Accenture debt is about 0.3% operating cash flows.

IBM has a lot of debt and if interest rates stay high then that could be a drag on its earnings / cash flows ability to invest in future technologies.

But interest rate effects of the past two years were minimal on IBM stock and more severe on MSFT and ACN stocks. So, I have no clue. I am starting to think people who horde in certain stocks are a breed onto themselves (with their distinct convictions) and they stick with those stocks until something drastically changes.

The inevitable question, is this the best investment if all I am going to get is clip coupons (dividends)? May be that is a too simplistic question. People who invest in this probably can chew gum and run at the same time, unlike me!

[anitya]

At what point does one start thinking may be the ticker "F" stands for F**K?  Any thoughts on the future prospects for F?  Another 5+% dividend yielding that seems directionless at best.

It is probably an insult to IBM to call F the IBM of the Auto industry?  

[kathiel]

anitya, I agree it would be an insult to IBM to call F the IBM of the auto industry. I'm not impressed with F.

[bb2]

Cars are a tough biz, until TSLA came along. BTW, where I am in Cali, I'd almost say Tesla's are the most common car on the road. Chargers are everywhere too. My grocery lot just installed 12, along with 6 more non-Tesla. My golf club should install some because it's like a Tesla dealer lot, if there was such a thing.

[uncleharley]

Jan 19, 2024 17:28:09 GMT kathiel said:

anitya , I agree it would be an insult to IBM to call F the IBM of the auto industry. I'm not impressed with F.

Today, IBM has set another intraday high.  The daily price trend has gone parabolic.  The current price is $173 and change.  My target based on chart patterns is/was $175.  Support may be found at $163 if a correction takes place.  One Professional analyst has a target of $200.  I am holding.  Qtrly earnings report is due on Wednesday.

[anitya]

So, egg on IBM stock doubters? The stock is up quite a bit in after hours, after earnings release. Price appreciated 14% since the OP.

Earnings beat Q4 estimates.

Revenues by segment:

Software Miss
Consulting Miss
Infrastructure Beat
Financing Miss

I did not see AI revenue break down but evidently they doubled AI revenue during the quarter.

Next year guidance - mid single digit revenue growth and $12B free cash flows.

[archer]

IBM has an interesting history with a wide product line over the years going back to the early 1900s, way before anything computer related, or at least computers as we think of them today. Products ranged from food processing equipment to weapons. Their products were used on both sides of WW2. en.wikipedia.org/wiki/IBM

[uncleharley]

IBM's price was up 8.5% in the first 5 minutes of trading. It might give some of that back. Then, again??

[anitya]

Jan 16, 2024 18:41:52 GMT anitya said:

Is IBM the Pfizer of Tech industry, except IBM recent chart is a lot encouraging?

Chart always beats intuition!

My sticking with PFE and not switching over to IBM was flawed.  Not only a better chart, IBM has the AI tailwind and PFE - no one is talking about GLP as much as AI!  I hope this lesson sticks with me - I can only hope.

stock is 13% higher for the day so far. 

[uncleharley]

PFE is a good investment also. Trading volume for IBM is on track to be 4 times a 60 dma at the close. Price is beginning to flatten out on an intraday chart and volume should return to normal.

[kathiel]

I sold a slice of IBM today as the pop put it way above my 5% limit per individual stock. I haven't decided what I'm going to buy with the proceeds.

[uncleharley]

Wow!! IBM closed today at $190.43 per share, up 9.49%, on trading volume of 27.6 million shares which was 5.5 time a 10 DMA. It seemed to develop short term support at about $188. The move was prompted by the release of a strong qtrly earnings report and positive guidance from management. 4 analysts have raised their target price for IBM up to $200 to $215 per share.

[bb2]

Still waiting on the 10-Q to find out what the heck $4.8B of "other revenue" is, out of 17.8B . That's pushing 30%. Defined as sales outside of regular business. I'm not seeing where where "other revenue" went past 190M or so in past quarters. Suddenly it's 4.8B.

Almost bought IBM on a whim yesterday for the earnings pop but didn't. I'd have sold today, though $210 is more than reasonable on momentum, considering the whole market is momentum driven now.

[bb2]

From the IBM call. These calls are always a bit hard to follow, as they're transcripts of people talking, which is never how they'd write; never as clear. But this goes beyond that, I think. A dodge maybe? Counting chickens before they hatch? A new take on balance sheet leverage?

A couple simple questions from Toni:


Toni Sacconaghi

Yes. Thank you. I have one clarification and one question, please. So just on the free cash flow, Jim, I'm wondering, can you give us a bridge from net income, which I think The Street is expecting is about $9 billion or a little over for fiscal '24 and how you get to $12 billion in free cash flow, not from 2023 levels but from net income levels? And maybe in that, can you just clarify how much do you expect depreciation expense to be? And how much do you expect CapEx to be and how big a contributor is that?

And then secondly, on the AI book of business, I think you said low hundreds of millions that doubled. So should we be thinking $300 million to $400 million? And it sounds like a third was in software. Was that revenue recognized during the quarter? And then the other couple of hundred millions were consulting signings? Can you just elaborate specifically on exactly what the book of business means?

Jim Kavanaugh

Okay, Toni. Let me take the first piece, and I appreciate the question as always, and then Arvind can talk about the AI overall. For increased transparency, by the way, coming out of third quarter, where we delivered free cash flow of $1 billion up year-over-year, Arvind and I and many other of the senior leaders, we've spent a tremendous amount of time with our investors. And our investors were actually guiding us, coaching us around giving increased transparency about the drivers right at the heart of your question. That's why we put in both the press release and in the supplemental earnings chart a bridge down from operating pretax income down to adjusted PTI.

Why? As I stated in Wamsi's question, for depicting the quality and sustainability of our free cash flow. So when you look at 2024, so to your point, I'll leave '23 aside. When you look at '24, it's entirely going to be driven, and more by the growth in adjusted EBITDA. And when you look at net income and you break it down, there's not that much difference between net income overall and the adjusted EBITDA overall.

So the $900 million is purely a function of the confidence we have in the portfolio, the mix, the scale, the operating leverage and the productivity, which you heard on the prepared remarks, we took up to $3 billion here as an annual exit run rate by the end of 2024. So it's an entirely driven balance sheet. We'll have dynamics going one way or the other, cash tax modest headwind but those all kind of wash out. It's going to be entirely driven by the business fundamentals.

Arvind Krishna

Thanks, Jim. So Toni, on the AI book of business, this is not all revenue in the quarter. I would just begin with that statement to set it straight. At this stage, we wanted to start looking at what is our momentum, what is the sentiment from our clients. So we went to a measure that is more reflective of, I'll use the word signings. What is the commitment the clients are making to us?

Consulting is straightforward. It is the signings. Consulting signings are anywhere from 12 to 24 months on average is how much time they play out over there. And on software, it's what they're committing to. And we are using SaaS ACV. So it's a 12-month commitment, which is typical for as a service as well as, since we do offer our portfolio both ways as license or as a service, it includes the license piece as well.

Now over a long-term, let's call it a couple of years or more, yes, the book of business should turn into an amount of revenue in a quarter, but that's going to take a bit of time to catch up. But we felt that this gives the better indicator right now of what is our traction and what is our acceleration in that part of the business.

[anitya]

Fake it until you make it is the current general theme with AI?

[uncleharley]

If B S was music, they would make a symphony. However, their technicals indicate the stock is going higher.

[kathiel]

I sold the slice of IBM at $194. I like the $200 - $215 target.

[uncleharley]

As a rule, I don't buy falling knives and I don't sell rockets that have just been launched so I still hold my position. However, you can buy your position back already at a lower price so that certainly looks like a good trade. I expect the price to consolidate over the short term, before it continues to advance.

[uncleharley]

According to todays report from Benzinga, the Whales are feeding on IBM stock.

www.fidelity.com/news/article/investment-news/202401291416BENZINGAFULLNGTH36831439