- Big Data is where all industries are going and Watson will be at the forefront of this shift.
- IBM recorded almost 50% gross margins last year which was 3% higher than 2011 when revenues were at $106k.
- I expect many tech stocks to sell at a premium over the next 12 months, especially IBM, as it is undervalued at present.
IBM (NYSE:IBM) is currently trading at just over $154 a share which means it won't be long before it takes out its pre-Brexit highs of $155.35. In fact, IBM has outperformed the S&P 500 (INDX:SPAL) since the 27th of June which could be a sign of things to come.
The bears were out in force again when the tech company's share price dropped to $143.50 on the 27th but I wasn't surprised to see the stock bounce back aggressively. The bears argument is that the company's core operations will continue to come under increasing pressure despite the growth of its Strategic Imperatives divisions.
Furthermore, the company made 6 acquisitions last quarter and bearish analysts (despite the growth in SI) believe that pricing could become an issue once these rapidly growing divisions slow down a touch. Personally, I believe we are nowhere near that stage. Yes, I acknowledge the declining revenues count for 4 straight quarters but IBM management in my opinion deserve huge plaudits for how the company is transitioning.
In a world where growing profits are almost demanded by shareholders every year, IBM has decided to take a step back, look at where the industry is going and plot its course towards becoming a much bigger company in the future. Here are three strong reasons why this company should be a core position in your portfolio.
Watson is Perfectly Positioned To Take Advantage of The Shift Into Robotics And Automation
As technology changes and improves with every passing year, it is now obvious that software solutions and artificial intelligence programs are going to alter our future in a big way to the extent that human labor will be far less needed in years to come. In fact, the Bank of England estimates that almost half of human labor will be replaced by robotics and AI in the future and currently IBM's Watson is at the forefront of this "shift" which is happening in the world at present. Watson is designed to formulate strategies and solutions from the analysis of big data. Expect "Watson's" demand to spike in the next few years as more and more industries turn to more efficient ways of finding solutions for their problems.
Growth In Strategic Imperatives Will Result In Higher Margins
When it comes down to it, IBM's core revenues may be declining but its Strategic Imperatives divisions are growing much faster and at higher profit margins. When you couple this with the $30 billion+ the company has ploughed into growth areas such as Security, Cloud, Mobile & Analytics, it is evident that Strategic Imperatives will one day be IBM's main driver of top line growth.
Bears are too focused on the company's legacy businesses and divestitures instead of looking at the amount of value the company will bring to its respective markets. In fact, Strategic Imperatives now make up 37% of the company's top line which is a huge growth considering these divisions only made up 13% of revenue back in 2010. Why isn't anybody talking about this? Well, they will and when that happens the market will substantially price this stock higher.
The Nasdaq Is Going Higher. IBM Won't Be Left Behind
If we look at a chart of the stock, we can see that once it gets past the $155.50 range, there is no resistance until it reaches the $165+ level. Furthermore, I cannot see IBM languishing in the face of a rising NASDAQ which I predict will break out to new highs any day now. Even if I am wrong on my assumption and IBM stays range-bound for the foreseeable future, its large cash flow levels will ensure that rising dividends and large buybacks will continue. There seems to be no middle ground when analysts are valuing this stock. Ignore the bears by focusing on the higher margins and growth in areas where the company really wants the grow in... All else is futile in my opinion.
To sum up, IBM has put its R&D in the right place by focusing on where it can offer real value going forward. In fact in recent years, IBM sold off divisions that were still growing which will turn out to be the right call in years to come. Sometimes you need to take one or two steps back in order to grow stronger going forward. Don't be surprised to see IBM stock above $200 a share in 12 months time.