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Is IBM Stock a Buy?

By David Jagielski - Sep 27, 2019 at 9:31AM

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While it's a good option for dividend income, IBM's stock may not be ideal for investors looking for growth.

Shares of IBM ( IBM -0.02% ) have had a strong and volatile 2019, with year-to-date returns now at around 25%. And the tech stock could still be a good buy today. Let's take a closer look at what the company has been up to as well as its most recent results.

New z15 could unlock significant growth for the company

Earlier this month, IBM unveiled its latest mainframe, the z15. It's an exciting new product that could drive lots of sales growth, since the recurring theme in the hardware sector is privacy. The z15 will allow companies to more easily manage their privacy, with IBM calling it "an industry-first capability to revoke access to data across the hybrid cloud." That flexibility is crucial, as an outside party is often the cause of a data breach, so having the capability to modify access more readily with the z15 will be a big selling point for IBM.

A cloud computing icon.

IMAGE SOURCE: GETTY IMAGES.

By being able to quickly respond to new threats and information, companies can update and change access levels accordingly. IBM is also making it possible for clients to encrypt data more easily across the cloud and to keep it secured even as it travels. With more companies working on the cloud, there is more of a need than ever to ensure data is protected, and that's where IBM z15 and its added controls come it.

Whether these attractive capabilities will translate into significant sales growth is the big question.

Earnings coming up next month

IBM is expected to release its third-quarter earnings in mid-October. The company is coming off a Q2 that beat earnings expectations but didn't do enough to get investors excited, as management did not change its guidance for the year. However, beating earnings is something that IBM has done with ease; the last time the company fell short in that area was back in 2014.

The problem is that an earnings beat alone might not be enough to send the stock up in value. Over five years, IBM has seen a lot of volatility, and its share price has lost around 25% of its value during that time. Sales have been down for four straight quarters, and without seeing something to boost the company's top line, investors might not get excited about a business that's also seen its profits shrink over the years.

Key takeaways for investors

For a company that hasn't been achieving much in the way of growth, paying seven times book value and 15 times earnings might be a bit too rich for investors. While there is hope that the z15 could lead to some positive results in future quarters, it's too early to bet on that just yet. Investors might be better off waiting to see what IBM's results look like with the new hardware before deciding whether to buy the stock. However, its dividend yield, at 4.5%, could be an attractive option for income investors.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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