IBM Stock: Improving, but Turnaround Could Take Long

Shares of classic tech titan International Business Machines (IBM) have been going nowhere in a hurry over the past few years. After clocking in a solid quarter alongside some spectacular margins, there are reasons to believe that the firm is ready to break out of its multi-year funk.

Though the fourth-quarter numbers were sensational, with the top- and bottom-line beating estimates, it may take more such quarters to get behind the tech stock that Warren Buffett had given up on many years ago. Simply put, investors need more than just patience with shares of IBM. One needs to be willing to settle for years worth of fluctuations without much to show for it.

After a strong finish to 2021, IBM stock looks fairly valued at best. As such, I am neutral on the stock for now.

IBM’s Dividend is Enticing, as Stock Looks to Power Higher

One of the main draws to IBM stock is its bountiful dividend, which yields around 4.8% at the time of writing.

Though the sizeable dividend is well-supported by cash flows, the money may have been better used in R&D to allow IBM to catch up to the competition in the tech space. Indeed, it’s tough to balance such a hefty dividend commitment and stay on the cutting edge of innovation. The tech sector really isn’t known for its large dividend payouts.

IBM has been facing the tough, uphill battle for quite some time now. Despite recent quarterly beats, though, investors may have a while to wait before the firm is in a spot to garner positive momentum again. Simply put, the company may not be innovating at a pace to keep up with the likes of the competition.

The company has a long history as a notable laggard in the tech sector. However, the recent margin trajectory is nothing short of encouraging.

Impressive Margins Over at IBM

Thanks to the spin-off of IT service management firm Kyndryl, a business that’s dragged on growth and margins, IBM has the means to improve its profitability prospects moving forward. Indeed, IBM’s recent margins were one of the biggest standouts in its latest quarterly numbers.

Despite the limited growth runway, I do think IBM stock could find a spot with value-conscious investors once again, as rates rise and the limelight looks to shine back on companies that are actually making a profit.

Undoubtedly, IBM has the desire to make some noise in lucrative tech sub-industries (think cybersecurity and quantum computing). If it does make a splash, IBM’s growth profile could get a much-needed boost after years of flat-to-negative revenue growth.

Still, as a very mature company, the firm needs to find the right balance of growth and margins if it’s to break its funk. For the fourth quarter, both metrics showed promise. Should more of the same be in the cards, value-conscious tech investors may finally have a reason to buy the old-time tech titan.

IBM Is Making the Right Moves, but There’s More Work to Do

With a modest valuation and low expectations on the growth front, single-digit sales growth and subtle margin expansion could be all that the stock needs to sustain a rally towards its elusive all-time highs.

Unfortunately, Kyndryl wasn’t the only low-growth business dragging IBM’s top-line growth numbers down. Further spin-offs or transitions into higher-growth areas could alleviate some of IBM’s growth woes. Still, the big question is if the firm would be better off without the sizeable dividend commitment so that it can take its reinvestment to the next level.

Wall Street’s Take

Turning to Wall Street, IBM stock comes in as a Hold. Out of 13 analyst ratings, there are five Buys, six Holds, and two Sell recommendations.

As for price targets, the average IBM price target is $145.75, implying an upside potential of 5.8%. Analyst price targets range from a low of $115.00 per share to a high of $185.00 per share.

The Bottom Line on IBM Stock

IBM is showing signs that it can be a great stock to own again, but it could take more than just a quarter or two to regain the love of investors.

For now, I view IBM stock as untimely. At ~22 times trailing earnings and ~2.1 times sales, the valuation looks to be in the right spot.

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