In today’s climate, investors face an incredible amount of volatility as political developments and global health conditions shift industry outlooks in the blink of an eye and leave all of us reeling. Proponents of value investing, however, remain unshaken. Their steadfast strategy of buying companies with strong fundamentals at fair prices and holding for the long term is well suited to times like these, where temporary market conditions create material price swings. If you’re in the retinue of value investors, International Business Machines may have caught your attention recently.
IBM’s history stretches back to its 1911 founding and since, the company has fashioned itself into a mainstay of the American technology industry. In 2019, IBM served customers in over 170 countries and generated upwards of $77 billion in revenues, stemming from its Cloud & Cognitive Software, Global Business Services, Global Technology Services, Systems, and Global Financing segments. For most Americans IBM is probably synonymous with the computing hardware the firm is best known for like floppy disks, magnetic stripe cards, and desktop computers. However, the firm has been slowly reinventing itself as the bleeding edge of technology has shifted away from hardware and towards software, cloud computing, and artificial intelligence. This process has been slow, and IBM’s share price has declined almost 50% as the structure of technology industry has shifted and left IBM chasing after the pack.
However, IBM is taking huge strides towards improving its position as of late, spinning off its low-margin IT infrastructure segmentand making acquisitions that it hopes will lay the foundation for it to become a behemoth in the cloud computing and artificial intelligence space. For example, in mid-2019 IBM acquired Red Hat, a North Carolina based provider of open source software products, for $34 billion in order to bolster its position in the space. Looking forward, IBM hopes that the large government agencies and corporations that make up its current customer base will eventually demand “hybrid cloud” computing solutions that mix traditional, on-premise technology with a cloud-based component.
All of these developments reflect the degree to which IBM is attempting to reorganize its business so that the lion’s share of its revenues will be eventually be generated by software and other high-value services that are recurring in nature – a feature that ensures a more stable revenue base. Currently, value investors looking at IBM will note that the firm’s relatively low share price and momentum scores contrast interestingly with low price to equity ratio of 12.8 and a strong dividend ratio of 5.76%.
A core feature of value investing is having the patience to allow the market to realize the value of a potentially undervalued company. For IBM shareholders, this means hoping that a leaner organization will allow IBM to plough more cash back into cutting edge computing technologies and join the ranks of the “big tech” firms that dominate modern markets. Should IBM’s decisions to invest in cloud computer and artificial intelligence while moving away from IT infrastructure pay off, there is potential for significant upside at current valuations, and value investors will have one more data point to prove why it pays to be patient.