IBM Eyes First Record Since 2013 as AI Optimism Fuels 19% Rally

03/20/2024 19:35

(Bloomberg) -- One of the oldest companies in tech has been quietly trouncing some of the hottest stocks on Wall Street.Most Read from BloombergTrump Rules Out Vivek Ramaswamy as Running Mate as He Eyes New TeamWhat Happens If Trump Can’t Post His $454 Million BondUltra-Wealthy Are Souring on Chicago’s Most Elite NeighborhoodApple Is in Talks to Let Google Gemini Power iPhone AI FeaturesNvidia Looks to Extend AI Dominance With New Blackwell ChipsInternational Business Machines Corp. recently hit

(Bloomberg) — One of the oldest companies in tech has been quietly trouncing some of the hottest stocks on Wall Street.

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International Business Machines Corp. recently hit its highest since 2013, putting it about 6% below an all-time high as investors bet that a turnaround is finally bearing fruit after years of tepid growth and share-price returns. Compared to the Magnificent Seven, IBM’s 19% gain this year, including dividends, trails only Nvidia Corp. and Meta Platforms Inc.

“IBM has been discounted by the rest of the industry, but it has made a lot of investments in both cloud and AI, and with a strong AI business, we could see growth inflecting higher,” said Jethro Townsend, portfolio manager at Nia Impact Capital. He cites the firm’s cash flow generation and “healthy” dividend yield as factors that provide room for it to re-rate higher.

Much of the year’s advance followed IBM’s results in late January, when it gave a better-than-expected forecast for both free cash flow and revenue and said it was seeing growing demand for its AI products. The company has also cut jobs and expects to pause hiring for roles that could be replaced with AI, which is seen as a potential tailwind for margins.

The stock’s surge is a recent phenomenon, however; while Apple Inc. has lagged this year, its five-year total return of 275% is much stronger than IBM’s 82% gain over the same period.

Wall Street remains divided, with bulls outnumbered by skeptics and bears, according to data compiled by Bloomberg. While it looks cheaper relative to most big-tech stocks, IBM’s multiple of 19 times estimated earnings is near its highest in 20 years. Furthermore, the stock is 4% over the average price target, among the worst return potentials among components of the S&P 500 tech index.

Still, the company offers something that is something of a rarity among big tech: a robust dividend. The indicated yield is 3.43%, well above others in the sector. The indicated yields for Apple Inc. and Microsoft Corp. are below 1%, and while Nvidia pays a dividend, the yield is essentially non-existent.

That hasn’t been enough to entice bulls in the face of IBM’s growth potential, which is expected to remain far below the megacaps. Revenue is expected to grow at a single-digit pace for the next several years, compared with double-digit expansion for other AI-adjacent companies like Microsoft or Alphabet Inc. Its most recent report failed to juice expectations; while the consensus for the company’s net 2024 earnings is up 4.4% over the past quarter, the view for revenue has barely budged, per data compiled by Bloomberg.

“The CEO has done a heroic job in starting to turn the company around, but it is just generally slower growth, and not cheap enough to be enticing relative to those more modest prospects,” said David Katz, chief investment officer at Matrix Asset Advisors. “We can easily do better elsewhere.”

Tech Chart of the Day

In a measure of how tech continues to be driven by its biggest companies, an index of small-cap tech stocks is down 7% this year, making it a dramatic underperformer compared with other size categories. The S&P 500 tech sector index, which tracks large-cap tech stocks, is up 12% in 2024. However, an index of mid-cap tech has done best of all, with a gain of 14%.