IBM's (IBM +0.06%) market cap briefly eclipsed Microsoft's (MSFT 1.33%) back in Dec. 2011. At the time, both tech giants were worth just over $210 billion, and they were both struggling with the seismic shift toward mobile and cloud technologies. But today IBM is worth $168 billion, and Microsoft is worth $3.04 trillion.
IBM struggled to expand its on-premise software, hardware, and IT service divisions as its enterprise customers pivoted toward cloud-based services, and it repeatedly reduced its annual revenue by divesting its weaker business segments. Microsoft countered those existential threats by aggressively expanding its Azure cloud infrastructure platform and shrewdly transforming its desktop software into cloud-based services and mobile apps.
Image source: Getty Images.
IBM's mistakes were disappointing, but its CEO Arvind Krishna has made some sweeping changes since taking the helm in April 2020. Could those turnaround efforts breathe fresh life into Big Blue and turn it into a trillion-dollar company by 2030?
How is IBM fixing its business?
Krishna's first major move was the divestment of IBM's slow-growth infrastructure services segment as Kyndryl in Nov. 2021. That divestment eliminated a major weight on the company's top-line and bottom-line growth and freed up more resources for the expansion of its higher-growth hybrid cloud and artificial intelligence (AI) services.
NYSE: IBM
Key Data Points
Krishna was previously IBM's cloud chief, and he likely realized it was too late to catch up to Amazon, Microsoft, and Alphabet's Google in the public cloud race. However, IBM could still leverage its existing enterprise presence to offer more hybrid cloud services -- which process the data that flows between the private and public clouds -- to companies that aren't quite ready to migrate all of their data to the public cloud. It could also roll out more AI services on its hybrid cloud to process all of that information.
That strategy relies heavily on Red Hat, the software maker it acquired for $34 billion in 2019. Red Hat develops open-source software that is universally compatible with a wide range of private and public cloud computing platforms. That flexible mix-and-match approach enables IBM to carve out its own niche and profit from the secular expansion of the cloud and AI markets without directly competing against Amazon, Microsoft, and Google.
Krishna also restructured IBM's businesses into three simpler segments (software, consulting, and infrastructure), set a goal for generating "mid-single-digit" revenue growth from 2022 to 2024, streamlined the company's spending, and said it would replace thousands of its human employees with its own AI tools over the next few years.
But can single-digit growth create a trillion-dollar stock?
IBM's revenue rose 6% in 2022 and 2% in 2023, and analysts expect 3% growth in 2024. Its adjusted EPS grew 15% in 2022 and 5% in 2023, and is expected to rise 5% in 2024.
Those growth rates indicate IBM's turnaround strategies are paying off and turning it into a reliable blue-chip tech stock again. It can also easily support its forward yield of 3.6%, since it only spent 54% of its free cash flow (FCF) on its dividends in 2023. Those attractive qualities brought the bulls back to IBM's stock -- which rallied more than 30% over the past 12 months, yet still looks cheap at 18 times forward earnings.
Nevertheless, IBM would still need to grow a lot faster to become a trillion-dollar stock by 2030. Assuming its valuation ratios hold steady, it would need to grow its adjusted EPS at a compound annual growth rate (CAGR) of 34% from 2024 to 2030 to boost its market cap sixfold to $1 trillion. That would be a tough target for even higher-growth tech companies like Microsoft to achieve.
But IBM could still be a good long-term investment
IBM probably won't follow Microsoft, Amazon, and Alphabet into the four-comma club anytime soon, but it's still a solid long-term investment. If IBM's multiple remains unchanged, it matches analysts' estimates, and it only grows its adjusted EPS at a CAGR of 5% from 2024 to 2030, it could still be worth $220 billion -- 30% higher than its current market cap -- by the final year. And with annual dividend hikes and reinvested dividends, IBM's stock could easily deliver a total return of 60%-70%.
If IBM grows at an even faster rate or commands a higher valuation, we could easily see its stock double by the end of the decade. In other words, Big Blue's strengths should outweigh its weaknesses for the foreseeable future -- even if it doesn't evolve into the next Microsoft or become a trillion-dollar stock.
