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Reasons Why IBM is Worth Holding in Your Portfolio Now

Zacks

A successful investor understands the importance of retaining well-performing stocks in the portfolio at the right time. Notably, indicators of a stock’s bullish run include a rise in share price and strong fundamentals.

International Business Machines Corp IBM is one such technology stock that has been on healthy growth trajectory, of late. The company’s shares have returned 12.1% in the past three months, substantially outperforming the 10.3% rally of the industry.

Let’s delve deeper and take a look at some of the factors aiding the performance.


Positive Earnings Surprise History

IBM has an impressive earnings surprise history. The company outpaced the Zacks Consensus Estimate in the trailing four quarters, delivering a positive average earnings surprise of 3.4%.

Further, it has a long-term expected EPS growth rate of 4.95%.

Valuation Looks Impressive

On the valuation front too, the stock looks attractive. The company currently trades at a forward P/E multiple of 11.8x, significantly lower than the industry’s average of 74.4x. The ratio, which is obtained by dividing a stock’s current market price with its historical or estimated earnings, measures how much an investor needs to shell out per dollar of earnings. Consequently, the lower the P/E of a stock, the better it is for a value investor.

Other Driving Factors

IBM is involved in a number of Blockchain initiatives as the technology gains rapid mainstream adoption. The company is currently the dominant player in the blockchain market. Recently, CNBC quoted Juniper Research, which placed IBM above Microsoft Corporation in blockchain-related advancements.

The company uses hyperledger technology for its blockchain applications and is also a key member of the Hyperledger committee. This enables the company to gain access to prior notification of any changes in the underlying infrastructure.

IBM has been winning significant deals in recent times. The company has struck bank guarantee deals with ANZ and Westpac as well as a multi-line insurance contract with American International Group and Standard Chartered PLC.

It has also inked a deal with global food suppliers and another one with automobile manufacturer, ZF Friedrichshafen to enhance its Car e-Wallet technology.

This apart, IBM is also focusing on cloud computing which is evident from the fact that it continues to open data centers aggressively. Globally, the company owns 60 data centers across 19 countries.

The cloud computing market bodes well for IBM. Most recently, Forbes mentioned that the cloud computing market will be worth $162 billion in 2020 from $67 billion in 2015, at a CAGR of 19%.

IBM remains focused on solidifying footprint in the market, which is evident from expanding data centers. The company recently opened data centers (two in London, one in San Jose and one in Sydney) that are equipped with the required cloud infrastructure to help clients develop cognitive artificial intelligence (AI) and Internet of Things (IoT).

We believe this will improve IBM’s competitive position in the cloud computing market currently dominated by Amazon’s Web Services and Microsoft Corp.

Risks Remain

However, IBM is having a tough time, given the ongoing and heavily time-consuming business model transition to cloud. Further, sluggish IT spending particularly on on-premise and data center hardware and foreign exchange volatility remain concerns.

Moreover, intensifying competition in most of the markets is a major concern.

Zacks Rank & Other Key Picks

IBM currently carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the broader technology sector include Applied Materials, Inc. AMAT, NVIDIA Corporation NVDA and Broadcom Limited AVGO, all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Materials, NVIDIA and Broadcom have a long-term expected EPS growth rate of 12.7%, 10.3% and 13.8%, respectively.

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