Many tech stocks suffered price drops in 2022, such as Google's parent Alphabet, which hit a 52-week low on Oct. 26. Yet IBM (IBM -1.42%) weathered the storm well. Big Blue's share price has not reached a new 52-week low since last November when the company spun off its managed IT services division into Kyndryl.
IBM stock's resilience is thanks to the company's excellent performance this year, made more impressive by its ability to overcome substantial macroeconomic factors affecting it and other global tech companies, such as a strong U.S. dollar.
Big Blue set investors' expectations for success last year when it outlined goals of mid-single-digit revenue growth per year from 2022 through 2024 and cumulative free cash flow of $35 billion in that time period. So far this year, the company is meeting these goals.
The company's success is thanks to a strategy tailor-made to its strengths. This year's performance shows the strategy is working and illustrates that Big Blue has the ability to prosper for years to come.
IBM's hybrid cloud approach
IBM's strategy is to carve a niche for itself in the competitive cloud computing industry by specializing in the hybrid cloud space, which utilizes both public and private cloud implementations in parallel. IBM spent the past few years transforming itself into a hybrid cloud business, starting with its 2019 acquisition of Red Hat, a leading provider of open-source cloud computing technology. Last year's Kyndryl spinoff completed the company's transformation into the new, cloud-focused IBM.
In doing so, Big Blue went from years of declining revenue to revenue growth. In 2021, IBM's revenue of $57.4 billion, when accounting for divested businesses, was a solid step up from 2020's $55.2 billion.
In its first year as the new IBM, the company's 2022 performance looks to exceed 2021. Through three quarters this year, IBM has experienced consistent year-over-year revenue growth.
| Quarter | Revenue | YOY Growth |
|---|---|---|
| Q3 2022 | $14.1 billion | 6% |
| Q2 2022 | $15.5 billion | 9% |
| Q1 2022 | $14.2 billion | 8% |
Data source: IBM. YOY = year over year.
This performance was in spite of the severe impact a strong U.S. dollar had on IBM's business. About half the company's revenue comes from outside the Americas. Consequently, IBM's third-quarter revenue took about a $1 billion hit due to the currency impact.
How IBM's strategy aligns with its businesses
IBM's hybrid cloud approach is a perfect fit for its cadre of enterprise clients, such as Citi and Barclays. Big Blue's customers are primarily in the financial services, government, and healthcare industries, all of which require the strict security controls delivered by private clouds while taking advantage of the IT cost savings offered by public clouds.
Similarly, IBM's enterprise customers want the hand-holding offered by the company's consulting division, which helps clients adopt and implement Big Blue's tech solutions. This one-two punch has served IBM well, as evidenced in its financial performance.
The company's hybrid cloud revenue was up 15% over the trailing 12 months. Meanwhile, its consulting division, which accounted for $14.3 billion of its $43.8 billion in revenue over the last three quarters, saw Q3 revenue rise 5% year over year.
The company's infrastructure segment also adds to IBM's hybrid strategy by selling servers for private cloud use. This division had an outstanding third quarter, with revenue up 15% year over year. It was down 2% in the first quarter but bounced back in the second quarter with the release of the IBM z16 mainframe server in April. The z16 includes an artificial intelligence (AI) chip.
AI is another growth area for Big Blue since it's well-suited for IBM's enterprise customers. These clients need the power of AI to streamline large operations and reduce costs.
For instance, the U.S. Department of Veterans Affairs adopted IBM technology to automate workflows. McDonald's is using IBM's AI tech to test an automated drive-thru.
IBM's future growth
This year's performance led IBM to raise its 2022 full-year forecast based on constant currency figures, which makes sense given the considerable currency headwind on IBM's business. Big Blue's prediction of mid-single-digit revenue this year is now expected to be above that level in constant currency.
IBM's 2022 success is poised to continue next year. During its Q3 earnings call, IBM management reiterated its belief that the company will achieve mid-single-digit revenue growth in 2023, along with continuing to progress toward its $35 billion cumulative free cash flow goal.
The tailwind of industry growth will boost Big Blue's business. The hybrid cloud market is forecasted to rise from $85.3 billion last year to $262.4 billion by 2027.
Add IBM's hefty dividend, currently at a 4.9% yield, to its revenue growth and winning strategy, and Big Blue looks to be a good long-term investment.
