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IBM beat all its large-cap tech peers in 2022 as investors shunned growth for safety

IBM CEO Arvind Krishna speaks on the IBM facility in Poughkeepsie, New York, on October 6, 2022.

Dana Ullman | Bloomberg | Getty Images

IBM it will not be often described as a hot company. But in a 12 months where investors ditched all major tech stocks, Big Blue was green.

Nasdaq ends its worst 12 months since 2008. High gas prices, soaring inflation and the regular pace of rate hikes by the Federal Reserve have weighed down on growth stocks and favored more mature, less volatile names which might be seen as more recession-proof.

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Tech names that flourished through the Covid era suffered essentially the most because the economy reopened and consumers fell back into many aged habits.

Among US tech corporations valued at a minimum of $50 billion, IBM is one among only two corporations to have generated positive returns to date in 2022. Shares were up 6% year-on-year at Friday’s close. The second winner is VMwarewhich is up 5% because it agreed to be acquired by in May broadcom for $61 billion.

While goal, Amazon and Tesla were knocked down, investors turned to 111-year-old IBM for its regular returns alongside energy stocks corresponding to Exxon Mobilhealthcare names, incl Merck and industrial Northrop Grumman and Lockheed Martin.

IBM beats Big Tech in 2022


IBM is “trading well above its historical range,” Bernstein Research analysts wrote in a December 20 memo to clients. The company has a hold rating for the shares.

No one will mistake IBM for a growth company. Expansion is consistently in the only digits, and last 12 months the corporate spun off Kyndryl, its infrastructure management services business, right into a separate listed entity. This reduced the variety of heads by about 90,000.

But IBM generated $752 million in free money flow within the last quarter, up 25% from a 12 months earlier, and paid out $1.5 billion in dividends. Third-quarter earnings and revenue exceeded estimates, and the corporate raised its full-year guidance.

Crawford Investment Counsel in Atlanta, which focuses on earnings and dividends, checked out IBM in 2016 and concluded it might be too early to make a giant investment, he said Aaron Foresmanstock market analyst in the corporate.

“Much closer to their vision”

Crawford’s thesis modified in 2019, after IBM bought the faster-growing Red Hat for $34 billion. The company, which now manages $6.7 billion, increased its stake in IBM from $2 million to $30 million and continued buying until its holdings reached $109 million.

IBM took a hybrid approach to the cloud under the leadership of CEO Arvind Krishna, who replaced Ginni Rometty in 2020. public cloud slightly than relying entirely on one approach or the opposite.

“Three years later, this is way closer to their vision than anything in the general public cloud,” said Foresman. His company sold 3% of its shares within the second and third quarters of this 12 months.

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Consulting stays an enormous a part of IBM’s business, accounting for a 3rd of its revenue. In this area, IBM works with large cloud service providers, slightly than competing closely with them. The company has a backlog of contacts with Microsoft value over $1 billion, and even greater with Amazon, Krishna said in an interview with RBC CEO Dave McKay in November.

IBM also made a technological advancement in 2022 with the introduction z16 mainframe computer. When a recent mainframe comes out, many purchasers upgrade. This results in more revenue from hardware and highly profitable transaction processing software that may be run on machines. The previous IBM mainframe boom cycle began in September 2019.

While IBM has stayed away from any spectacular high-priced acquisitions this 12 months, it has announced several smaller deals to spice up some opportunities. Earlier this month, IBM Agreement to purchase Octo, a Virginia-based consulting firm that targets government agencies. Terms haven’t been disclosed. This 12 months it also absorbed the consulting corporations Dialexa and Sentaca.

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Foresman described purchases as an appropriate use of capital and “so small that they do not necessarily reveal multiples of the deal.”

Even so, Krishna realizes that the economic situation will not be ideal. He said in October that higher prices had led to “some caution in talks” in Europe, where the corporate needed to arrange for a slowdown. He said that within the Americas, where IBM makes about 53% of revenue, the business climate is “very solid.”

Bernstein analysts said the direction of the share price may simply be based on the state of the economy slightly than any major catalyst contained in the company.

“Given its defensive characteristics and historical performance, we imagine IBM is more likely to do well if we proceed to place pressure on the markets, and more likely to fall behind the key indices if we enter a period of recovery,” they wrote.

IBM Model by 2024, calls for average single-digit revenue growth, translating into single-digit growth in free money flow.

This is enough for investors who’re in search of security of their capital establishments.

“Combined with mid-single-digit revenue growth, a number of points higher than EPS, and a 5% dividend yield, it’s — you understand, not homecoming, but it surely’s well inside our expectations of what we’re trying to attain,” he said. Foresman.

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