Stockchase Opinions

David Dietze IBM Common Stock IBM-N BUY Apr 27, 2018

He would be a buyer here, although it is not his highest rated pick. There are a lot of growth drivers, but it needs new leadership to consider breaking this into separate entities. It is only 11 times earnings and has a good dividend yield.

$146.480

Stock price when the opinion was issued

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BUY

It just reported great numbers and shares jumped 13%. Redhat has made this an AI winner. It rallied 34% last year. They've had 6 straight quarters of positive sales growth, leading to an earnings beat and excellent free cash flow. Their full year forecast includes accelerating revenue growth and free cash flow. YOY growth: infrastructure -8%, consulting -2%, software 10% which is the largest segment, amounting to 43% of 2024 revenues. Software got stronger as 2024 wore on, and this segment could make up 50% of IBM's business. Specifically, Red Hat grew 16% YOY in Q4 and automation 15%. Watson X and Red Hat are key growers, enjoying the AI tailwind. Their GenAI business generates over $5 billion of business, growing by $2 billion, quarter-over-quarter. That said, shares went sideways last October given a miss in their consulting business, but the CEO feels AI will return this segment to growth in 2026. Tailwinds: a good backlog, record signing in Q4, and business in GenAI all support accelerating growth in low-single digits. Caveat: their PE is 24x PE and 22x in 2026, instead of around 10x, but their return to steady growth justifies the PE and software will generate more recurring revenue. An indirect AI play that won't be hurt by DeepSeek.

PAST TOP PICK
(A Top Pick Mar 13/24, Up 33%)

Bought on promise of its AI partnerships. Moved up steadily, but he worried that legacy businesses were lagging. He sold when valuations got into low 20s. Have to know when to buy, and when to sell.

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Curated by Allan Tong since 2019.
99+ opinions with 4.15 rating.

TOP PICK

Can a stock that's rallied 36% in the past year be considered a dark horse? IBM can. It outpaced the higher-profile Apple, which climbed 25.5% in the last 12 months and Alphabet by 3%. What is IBM doing right? Software. It's shed its old identity as a stodgy hardware company and tilted hard into software. True, shares dipped last October when they missed their numbers in the consulting segment, but shares jumped this week from $228 to $258 after they reported.

HOLD

He added it last May, and up 51% since. Today's more fully valued at 23x. Remains a long-term hold, given their AI consulting.

PAST TOP PICK
(A Top Pick Mar 13/24, Up 30%)

It wasn't seen as an AI play until their partnership with Microsoft. Shares then rallied. He sold around $235 after the PE jumped as its value dropped. 

BUY

Legacy tech giants like this have been some of the top names this year and are a good place to hide. They boast strong earnings, reasonable valuations and good growth in AI.

SELL

Between hardware and software, higher margins and greater growth still belong to the software side. He's looking more to consulting, with its higher margins.

BUY ON WEAKNESS

It sank 6.6% right after earnings. The market got it wrong--this is a buy opportunity. After a lost decade, they returned to growth a few years ago. They spun off their legacy business and doubled-down on their Red Hat division, essential for AI. Rallied 34% last year, and held up even when AI corrected. YOY revenue was +2%, software +7%, consulting -2% and infrastructure -6%. Bountiful cash flow, though. Also, the reiterated full-year guidance. The quarter and business are good.

DON'T BUY

Good part is that it's part of quantitative computing, and this is where the stock can rally in the next 5-10 years. Doesn't feel it can put enough money in to become one of the leaders in that area. That's why he owns MSFT.

WATCH
Quantum computing space.

This is the next phase. We've been in this AI growth patch for a while now, which won't end, but quantum is the next level. It answers a lot of the problems that we deal with in the world such as medical issues and cybersecurity.

Problem is, not a lot of developed companies in the space. The industry is quite immature, but sometimes (if you have a longer time horizon) that's where you find opportunities for decent, long-term growth. Unlike AI, quantum needs a lot of space (perhaps it could solve office realty issues). IBM is starting to look more prominent in that space.