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Is IBM Stock a Buy?

By Anders Bylund – Apr 14, 2020 at 7:49AM

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Big Blue's eight-year strategy shift is ready to pay dividends in the coronavirus era.

Technology powerhouse IBM (IBM -2.32%) has trailed the market for the better part of a decade now, even though the stock is holding up slightly better than the S&P 500 in 2020. The company reports first-quarter results early next week, so it's time to consider whether Big Blue is a good buy in the midst of the COVID-19 crisis.

Tackling the virus

The COVID-19 disease itself doesn't appear to threaten IBM's results in the near term. The company has not lowered its financial guidance targets, but IBM's press room is full packed with examples of how Big Blue is helping the world confront the virus.

Recently appointed CEO Arvind Krisha says that the pandemic will accelerate the adoption of cloud computing and artificial intelligence on a global level, though he left it unsaid whether the virus will help or hurt IBM's results in 2020.

"When we look at the usage of AI and cloud, I think it is especially going to accelerate also not just us, but how our clients are going to go on their digital transformations," Krishna said in a CNBC interview last week. "I believe this crisis is only going to accelerate that as we go over the next few months."

A woman walks through a modern data center, where many of the hardware racks are filled with quantum computing equipment.

Just another extraordinary day at IBM's quantum computing center. Image source: IBM.

Are we there yet?

This company has been transforming its business model since 2012, turning a one-stop-shop for every IT need into a focused specialist within artificial intelligence and cloud services. Under former CEO Ginni Rometty, IBM sold off most of its computing hardware operations in favor of heavy investments in software and services. The largest of these game-changing strategy shifts came in 2019, when IBM closed the $34 billion buyout of open-source software veteran Red Hat.

Former Red Hat CEO Jim Whitehurst now serves as IBM's President with a special focus on Big Blue's corporate strategy. CEO Arvind Krishna comes from a background of quantum computing, blockchain platforms, and artificial intelligence. Having both of these software industry heavyweights on the same executive team gives IBM a unique competitive advantage and a clear strategy going forward. IBM is all about artificial intelligence and cloud computing, at a time when both of these markets look absolutely ripe for explosive growth.

The upshot: Buy IBM today

IBM is trading at bargain-bin valuation ratios like 11 times trailing earnings and 16 times free cash flow. A steady stream of dividend boosts over the years plus a weak stock chart over the past decade adds up to a generous dividend yield of 5.3%. These numbers will change when IBM reports earnings next week, but I don't expect a whole lot of damage from the coronavirus pandemic.

In short, this looks like a great time to pick up some IBM shares. This company should be a winner in the post-coronavirus recession and income investors should be drooling over this opportunity to lock in a fantastic dividend yield.

Anders Bylund owns shares of IBM. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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