Is International Business Machines Corp. Destined for Greatness?

Let's see what the numbers say about IBM (IBM).

Apr 5, 2014 at 10:00AM

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does International Business Machines Corp. (NYSE:IBM) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell IBM's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at IBM's key statistics:

IBM Total Return Price Chart

IBM Total Return Price data by YCharts

 Passing Criteria

3-Year* Change


Revenue growth > 30%



Improving profit margin



Free cash flow growth > Net income growth

(9.8%) vs. 11.1%


Improving EPS



Stock growth (+ 15%) < EPS growth

39.5% vs. 29.7%


Source: YCharts.
*Period begins at end of Q4 2010.

IBM Return on Equity (TTM) Chart

IBM Return on Equity (TTM) data by YCharts

Passing Criteria

3-Year* Change


Improving return on equity



Declining debt to equity



Dividend growth > 25%



Free cash flow payout ratio < 50%



Source: YCharts.
*Period begins at end of Q4 2010.

How we got here and where we're going
IBM puts together a rather strong performance for such a large and well-established company by earning six out of nine possible passing grades. The biggest worry appears to be IBM's declining free cash flow, but flat revenue is also a concern despite the company's Herculean streamlining and buyback efforts, which have juiced bottom-line growth over the past few years. The company did raise substantial new debts to support its buybacks, which undermined it on the debt-to-equity assessment. How can IBM return to real growth? Let's dig a little deeper to find out.

IBM has been aggressively moving away from its traditional hardware segments in recent years to become a leader in cloud computing and business analytics. IBM recently sold its x86 server business to Lenovo, which depicts strong commitment to its cloud computing business. Fool contributor Chris Neiger notes that IBM has already completed about 15 cloud-focused acquisitions for a total of roughly $7 billion. According to IBM, the global cloud-computing industry is expected to be worth $250 billion by 2015, which bodes well for IBM's BlueMix platform, a cloud-based development tool. The company also plans to build 15 new data centers at a cost of $1.2 billion, which is expected to generate more than $7 billion in revenue by 2015. However, the company is already facing cutthroat competition from well-established cloud-computing players, most notably, Microsoft (NASDAQ:MSFT),, and Google.

IBM's also a big player in "big data," and according to IDC, total spending on big data technologies and services will increase by 30% this year over 2013, and more than a quarter all global applications will be moved to cloud over the next two years. Fool contributor Mark Girland notes that Microsoft recently announced its plans to utilize cloud-based networks to create smarter cities, while Intel (NASDAQ:INTC) introduced its Intel Cloud Technology program, which will allow customers to compare a wide variety of cloud-based technologies and services -- in essence, creating a one-stop-shop for the world's major cloud offerings. Cisco (NASDAQ:CSCO) will also be a major cloud player, as it's investing $1 billion to create Cisco Cloud Services to compete in this crowded field. Meanwhile, IBM continues to emphasize market penetration in emerging countries around the world, especially in the BRIC nations, which could be its leg up over less geographically diverse rivals. The company also signed a deal with Pitney Bowes (NYSE:PBI) to integrate IBM's cloud applications with latter's location services.

IBM also has high hopes for its Watson artificial intelligence suite, which first gained worldwide fame by trouncing the best human players to ever compete on the Jeopardy quiz-game show. Watson has since been adapted to medical uses, and its latest deployment is into financial services, where it's able to comprehend millions of pages of financial data in seconds while simultaneously parsing conversational data, including customer queries. IBM's Watson Group recently inked a partnership with Singapore-based DBS Bank, the country's largest, which is scheduled to begin in the second half of this year. Fool contributor Jessica Alling notes that Watson and the other software-based planners could offer greater potential upside for and encourage greater participation from the Millennial generation, which is still in the early stages of building its wealth.

Putting the pieces together
Today, IBM has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

3 stocks poised to be multi-baggers
The one sure way to get wealthy is to invest in a groundbreaking company that goes on to dominate a multibillion-dollar industry, whether it's in cloud computing, the Internet of Things, or another hot new sector that's only just getting started. Our analysts have found multi-bagger stocks time and again. And now they think they've done it again with three stock picks that they believe could generate the same type of phenomenal returns. They've revealed these picks in a new free report that you can download instantly by clicking here now.

Alex Planes owns shares of Intel. The Motley Fool recommends, Cisco Systems, Google (A shares), Google (C shares), Intel, and and owns shares of, Google (A shares), Google (C shares), Intel, IBM, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers