International Business Machines (IBM -1.74%) just released its first quarterly report for 2023. The results reflected many of the challenges being seen across the industry, and the slowing growth it indicated might deter some types of investors.
The report did not bring any significant surprises. Instead, it provided further evidence of the cloud stock's suitability as a pick for value investors. This subsection of shareholders would be wise to give this stock a closer look.
The Q1 report showed slowing top lines, but solid bottom lines
In Q1, total revenue came in at $14.3 billion, rising 0.4% year over year and 4.4% on a constant currency basis. Revenue declines in the infrastructure and financing segments offset strength in the software and consulting segments.
Missing from this report was a growth rate for the hybrid cloud, which attracted the attention of smart investors by drawing growth to the company. Hybrid cloud revenue grew 11% in 2022.
This omission may have stemmed from an apparent slowing compared with past quarters. Outside of measures in constant currency, no part of the company experienced double-digit revenue growth during Q1. Red Hat was the fastest-growing area, with revenue rising 8% versus 12 months ago. Management cited economic slowdowns and a strong dollar for pressuring growth, and indeed, peers such as Amazon echoed such sentiments in recent quarters.
Still, the struggles with revenue did not prevent IBM from earning $927 million during the quarter, a 26% increase from year-ago levels. Although most expenses rose during the period, income from non-core sources more than offset that increase. Quarterly free cash flow also rose to $1.3 billion, rising 8% year over year.
Furthermore, IBM reported its 2023 revenue outlook, forecasting a 3% to 5% increase (when measuring in constant currency terms). Nonetheless, with that estimate mirroring revenue growth levels in Q1, it could mean no significant revenue growth for the quarter if the dollar remains strong.
What investors should make of the report
Still, while IBM is not likely to attract growth investors anytime soon, value and conservative investors have many reasons to take a closer look. The fact that IBM stock was flat over the last year meant it outperformed most of its largest cloud competitors.
Moreover, IBM sells for a forward price-to-earnings (P/E) ratio of 13. From a valuation standpoint, that makes it a lower-cost stock than all of its larger peers except for Alibaba. But with the political risk Alibaba poses, conservative investors will likely prefer IBM.
They may also like IBM better for its dividend. Its current dividend of $6.60 per share yields just over 5%. That competes well with higher-interest bank CDs, meaning the dividend yield could appeal to investors looking for safety amid the recent bank failures.
Additionally, if history is any indication, shareholders will likely receive their 28th consecutive annual payout hike over the next few weeks. When a company raises a dividend annually for that long, confidence in that stock is heavily tied to the annual increases, making it highly likely IBM will continue this streak.
Making sense of Q1 earnings
In the end, the Q1 report did not deliver any significant surprises. While growth has slowed to a crawl, IBM's performance appears to reflect current economic conditions and dollar strength rather than inherent problems with the company.
Moreover, IBM's latest report should reassure value investors with its steady performance and increasing free cash flow. Hence, the dividend return and likely payout hike should make IBM popular among value investors looking for a more conservative, dividend-paying cloud investment.
