Technology stocks have been battered in 2022, but tech veteran IBM (IBM +1.74%) managed to resist that trend. After the stock hit a 52-week low of $114.56 last November, it rebounded and hovers around $133 at the time of this writing.
IBM's rise is attributable to a multi-year effort to transform its business, including spinning off its managed IT infrastructure services into the newly formed, publicly traded company Kyndryl last year. This was followed by an outstanding first-quarter earnings report this year.
With IBM's transition work behind it, have investors missed the investment opportunity? There's cause to believe the company offers more upside. Here are the reasons that point to a bright future for Big Blue.
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The new IBM is just getting started
IBM spent years shifting its focus toward the growing cloud computing and artificial intelligence (AI) industries. The company acquired Red Hat, a leading hybrid cloud computing company, in 2019. It promoted its head of cloud services, Arvind Krishna, to the CEO position in 2020, and completed the spinoff of Kyndryl last November.
IBM's transformation is now complete, and with Q1 being the first full quarter after the Kyndryl separation, investors can see how well the revitalized IBM is performing. Big Blue's Q1 revenue was $14.2 billion, up from $13.2 billion last year when adjusted for the Kyndryl spinoff.
The company's core offering is its hybrid cloud computing platform, which delivers a mix of a public cloud for cost savings and an on-site, or private, cloud for the storage of sensitive data, such as financial records. The hybrid cloud industry is forecasted to grow from an annual revenue opportunity of $56 billion in 2020 to $145 billion by 2026.
IBM is successfully capturing its piece of this industry. The company's hybrid cloud revenue for the trailing 12 months was $20.8 billion, a 17% year-over-year increase.
IBM's excellent Q1 results are just the start. With the hybrid cloud industry's expansion serving as a tailwind, IBM expects revenue to continue growing by about $3 billion per year from 2022 to 2024.
NYSE: IBM
Key Data Points
Multiple areas of growth
IBM isn't reliant solely on its hybrid cloud platform. Additional growth opportunity lies in its AI solutions. Big Blue has been working in the AI field for decades, and its current capabilities are being applied in a variety of scenarios. McDonald's is using IBM's AI to test an automated drive-through.
AI is infused in many parts of IBM's offerings. It's used in the company's cybersecurity products to dynamically recognize cybersecurity threats, in IBM's automation-related solutions, and to help analyze mountains of data for customers. IBM saw year-over-year Q1 revenue growth in each of these areas: 8% in security, 5% in its automation division, and 4% in its data and AI segment.
IBM also has a large consulting business, which helps customers select and implement IBM's technical solutions. This segment's Q1 revenue was $4.8 billion, a 17% year-over-year increase, which followed last year's 10% revenue growth.
Only the company's infrastructure segment, which sells computing hardware, saw Q1 year-over-year sales drop 2% due to the division's current IBM z15 mainframe servers nearing the end of their product cycle. The new IBM z16, the first to include a specialized AI chip, was unveiled in April with sales expected to ramp up over the coming months.
A potent combination
Its transformation means the new IBM offers investors a potent combination of revenue growth and a high-yield dividend, about 5% at the time of this writing.
While other companies such as Walt Disney eliminated dividend payments after the coronavirus pandemic triggered widespread lockdowns, IBM maintained its track record of dividend payments, which stretches back to 1916. The company even raised its dividend last month for the 27th consecutive year.
IBM's dividend will remain secure for years thanks to the company's ability to generate free cash flow, which IBM expects will hit a cumulative total of $35 billion from 2022 to 2024. This factors in 2022 free cash flow coming in toward the low end of its forecasted $10 to $10.5 billion range.
This year's impact on free cash flow comes from IBM's suspension of its business in Russia following the attack on Ukraine. Although comprising less than 1% of IBM's revenue last year, the company's business in Russia was a high-margin operation, so the shutdown cuts more deeply into IBM's profits and cash flows.
Even so, IBM's overall business possesses the ingredients to continue expanding revenue and maintaining the level of free cash flow needed to fund both its growth and its dividend. For instance, Big Blue recently added the U.S. Department of Education as a hybrid cloud client, while its consulting division's customers include all of the top ten banks, national governments, telecoms, and automotive companies.
With the new IBM's era just beginning, now is a good time to invest in this tech stock to capture the revenue growth coming over the next few years -- while enjoying a hefty dividend, to boot.
