The first five months of 2022 have been rough for nearly every technology stock. High-flying software stocks bid up during the pandemic have come crashing back to earth, and even ultra-profitable tech giants like Microsoft, Apple, Amazon, Meta, and Alphabet are down double-digit percentages. There's been nowhere to hide.
Almost nowhere to hide, that is. International Business Machines (IBM 0.18%), a tech giant that's long been written off as a dinosaur by many, came into 2022 with expectations at rock-bottom levels. Despite the market sell-off, IBM stock has managed to eke out a 4% gain year to date.
IBM's growth story
IBM has been transforming itself for the better part of a decade, but progress has been slow. It's safe to say that the company wasn't fully prepared for the rapid growth of the public cloud computing market. As Amazon Web Services and Microsoft Azure scooped up IT spending, IBM's business model started to look tired.
The silver lining is that IBM is now in a great position to help its enterprise customers navigate and manage complicated hybrid cloud infrastructures. IBM has its own public cloud offering, but the company is betting that large organizations will ultimately opt for a mix of on-premises hardware and multiple public clouds. This kind of setup requires sophisticated software to tie it all together.
IBM's $34 billion acquisition of Red Hat forms the foundation of its software efforts. Red Hat's OpenShift platform can run anywhere, from public clouds to servers in a data center.
More than 4,000 customers have adopted Red Hat's hybrid cloud platform, including the majority of Fortune Global 500 military, media, banking, telecom, and services companies. Built on top of this platform are IBM's software solutions for security, artificial intelligence (AI), analytics, and transaction processing.
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IBM's software business grew by 7% in the first quarter, excluding sales to the company formed by its managed infrastructure services spinoff. Red Hat software grew by 21%, while automation, analytics, AI, and security grew at mid-single-digit rates.
On top of software, a big organization looking to adopt a hybrid cloud architecture will likely need some help. IBM's consulting business is up to the task. Consulting brought in $4.8 billion of revenue during the first quarter, about $1 billion less than the software business. That revenue was up 17% year over year in the first quarter, driven by strong growth across all categories and geographies.
For the full year, IBM expects to produce mid-single-digit revenue growth, along with free cash flow of around $10 billion.
Still a cheap stock
IBM's growth isn't going to be earth-shattering, but if the company can deliver consistently, it's hard to argue that the stock isn't undervalued. IBM's market capitalization sits at around $125 billion today, putting the price-to-free cash flow ratio at less than 13. IBM also sports a solid dividend, with a yield of roughly 4.75%.
One thing that could derail IBM's plans is a recession. Economic uncertainty can lead organizations to delay tech spending to a degree, which would lead to reduced demand for IBM's software and consulting services. There's been no sign of this so far in IBM's results, but it's something to keep an eye on.
IBM is one of the few major tech stocks to deliver positive results in 2022. A beaten-down valuation has certainly helped, but it would be wrong to assume that's the only reason. The opportunity to help organizations move to and manage complex hybrid cloud infrastructures can drive solid growth for IBM, and the market may finally be waking up to that fact.
