International Business Machines (IBM 1.05%) continues to connect with its clients in the cloud, which has helped the tech giant post continually improving results. However, despite its transition into a more cloud-focused company, the company more broadly has continued to face its fair share of challenges.
As such, IBM stock continues to trade in a range, and it will likely take more than a post-earnings bump to change the paradigm for the stock moving forward. With that said, let's take a closer look at what's going on with IBM to determine better if it's worth considering today.
IBM's revenue and earnings
IBM has posted strong numbers since the spinoff of its managed infrastructure business into Kyndryl last year. The strength continued in the third quarter, as it reported more than $14 billion in revenue.
This was an increase of 6% versus 12 months prior and amounted to 15% growth when measured in constant currency. It also means that for the first nine months of the year, revenue rose 8% compared with the same period in 2021.
IBM has also bet its future on the hybrid cloud -- an ecosystem allowing public and private clouds to communicate more seamlessly -- and revenue in this area remains robust. Trailing 12-month revenue for the hybrid cloud came in at $22 billion, a 15% increase from the previous 12-month period. Meanwhile, free cash flow was $4.1 billion during the first nine months of the year, climbing 29% compared with the same period one year ago.
Additionally, IBM seems optimistic about Q4. It expects revenue growth to exceed its previous "mid-single-digit" forecast and believes it can generate approximately $10 billion in free cash flow. A one-time pension settlement charge has temporarily skewed IBM's price-to-earnings ratio. But when one measures its price versus free cash flow, the predictions and the results so far this year could make its 17 price-to-free cash flow ratio seem inexpensive.
The state of IBM stock
However, IBM's history may continue to present a challenge for the stock. It has fallen by more than one third over the last 10 years and first reached its current level in 1999.
Since Arvind Krishna became CEO in April 2020, IBM stock has risen by around 30%. But that came off the bear market in early 2020, and it has remained range-bound as it has repeatedly pulled back after crossing the $140 per share level.
Hence, its dividend has become a more compelling reason to own the stock. The $6.60 per share dividend yields 5% at current prices, a level exceeding the current 4.5% yield of the 2-Year Treasury note. It has also established a 27-year record of annual payout hikes, making it a Dividend Aristocrat.
Moreover, the purchase of Red Hat in 2019 and the spinoff of Kyndryl have made IBM a different company than it was 10 years ago. Its control of Red Hat gives it an advantage with the hybrid cloud. That appears to have made it an essential cloud stock, as it is now the world's fifth-largest cloud company.
Image source: Statista
Should I consider IBM?
Indeed, the increased cloud focus has reinvigorated IBM. With revenue growth in the high single digits and free cash flows improving despite a strong dollar, IBM has returned to growth.
However, investors who open positions in IBM should probably continue to buy for the dividend. The relative lack of stock performance means perceptions are not changing rapidly, and it is unclear when IBM stock will benefit from a more meaningful catalyst. Until IBM can hold on to its stock gains, investors should probably buy with a focus on income and treat any stock price growth as a bonus.
