Much has been made of IBM's (IBM 1.44%) string of five-plus years of quarterly revenue declines, particularly the last year or so. That IBM is in the midst of a significant transformation away from legacy hardware offerings to the cloud, cognitive computing, analytics, and other cutting-edge markets seemed to take a back seat to its total revenue "misses."
Good news! IBM ended its fiscal 2017 with top-line growth, outstanding results from its all-important strategic imperatives initiatives, and shaved overhead for the year. The result? IBM shares were down over 4% in after-hours trading following the news, and they are still off about 3%.
For investors in search of value, growth, and income, for a host of reasons, IBM stock now warrants a spot at the top of your watchlist.
Image source: IBM.
You're kidding, right?
It appears IBM has finally turned the corner, yet near-sighted bears continue to rule the roost: And therein lies the opportunity. Last quarter's $22.54 billion in revenue was a nearly 4% increase year over year, led by a 17% jump in IBM's strategic imperatives sales to $11.1 billion. As it stands, a whopping 49% of IBM's total revenue last quarter was generated by its key strategic imperatives segments.
Last fiscal year, IBM's cloud sales climbed 24% to $17 billion and now represents 21% of total sales. Long-time partner and sometimes competitor Microsoft (MSFT +0.66%) with its annual run-rate of $20.4 billion in cloud revenue is one of the few providers on the planet that can boast more cloud sales than IBM.
Similar to Microsoft, IBM's outstanding cloud-related growth is largely due to its software-as-a-service (SaaS) offerings. Hosting data is nice, but SaaS deployed in the cloud is where the real opportunities lie. IBM's comprehensive analytics, data security, and related sales skyrocketed last quarter.
IBM ended 2017 with an annual run-rate of $10.3 billion in cloud SaaS revenue, up 20% compared to 2016. Though IBM doesn't share specifics, its cloud data security revenue more than doubled in the fourth quarter, climbing 132% year over year.
And for those of us investors who appreciate profitability, excluding a one-time $5.5 billion tax hit thanks to the new legislation, IBM's $5.18 in per-share earnings not only beat vaunted analyst estimates, it was a 3% improvement compared to a year ago. Yet somehow, IBM stock is under pressure.
Image source: IBM.
What about those margins and guidance?
Depending on which pundit you choose to listen to, the "concerns" following IBM's fourth-quarter earnings were either depressed gross margins, guidance for the current quarter and year, or all of the above. The thing is, not only did gross margins improve sequentially, guidance for the current year is for continued revenue growth.
At the end of 2017's third quarter, IBM's gross profit margin sat at 45.9%, down from the prior year's 46.9%. IBM ended 2017 with a gross profit margin of 48.2%. Not only did margins improve sequentially, IBM expects they will stabilize this year, which should in turn lead to incremental improvements.
Another feather in IBM's cap, which will help improve margins over time, was its more than 4% drop in operating expenses last year to $24.8 billion. Though not a necessarily big factor considering IBM's number of shares outstanding, it ended 2017 with nearly 24 million fewer shares following its ongoing share buyback initiative.
As for that "poor" guidance, IBM expects to continue growing its top line for the both the first quarter of 2018 and the year, about 4% and 3% respectively. Unfortunately, or fortunately for value investors, IBM's forecast didn't sit well with pundits, and the sell-off gained steam.
Value, income, and growth
As it stands, IBM represents one of the best values in the tech sector. At just 13.6 times trailing earnings, and a meager 11.5 times forward earnings, IBM represents an absolute steal relative to its peers. Toss in its 3.6% dividend yield, twice its competitor's average, and IBM also warrants strong consideration from income-seeking investors.
I've been bullish on IBM for the last two years. Why? I was waiting for last quarter, and it finally arrived. Now the fun begins, so don't let the naysayers dissuade you. IBM stock has limited downside due to its bargain-basement valuation, fantastic payout, and bright, bright, future ahead.
