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International Business Machines Corporation (New York Stock Exchange: IBM) is based on our belief that the company is well-positioned to benefit from strong demand for hybrid cloud and AI. IBM is best known for manufacturing and selling computers Hardware and software, and cloud computing and data analytics. IBM’s position in the digital media market is expected to drive growth in its largest segments, software and consulting.
Despite inflationary pressure and foreign exchange headwinds, IBM reported strong results in the third quarter of 2022. The company saw growth in the software, consulting and infrastructure segments, but underperformed in the financial segment. YTD, the company is up about 6%. IBM expects meaningful growth to continue in 2023, benefiting from global digitization. As hybrid cloud and artificial intelligence (AI) expand, we are confident that IBM is a ready market. IBM’s hybrid cloud platform, AI technology and service capabilities support your digital transformation and help you engage with your customers and employees in new ways. IBM is also relatively cheap, trading 13.7 times as much as he C2024 on a P/E basis compared to its average peer group of 17.6 times. Investors are advised to buy shares at current levels.
Hybrid and AI demand tailwinds
IBM is essentially a technology company that offers hybrid cloud and AI solutions. Our bullish sentiment is based on our expectation that IBM will benefit from a global move to the cloud. The global hybrid cloud market size is expected to grow at a CAGR of 18.4% during 2021-2030. We believe IBM is evolving as a cloud and data platform provider, and we expect the company to ride the uptrend in the hybrid cloud market. IBM’s Q3 2022 report shows particular strength in its software and hybrid cloud business lines. The company has evolved its cloud platform, especially with its acquisition of Red Hat, and we believe this is reflected in its revenue. IBM reported revenue of $14.1 billion in the third quarter of 2022, beating estimates despite macroeconomic headwinds.
Approximately 70% of IBM’s annual revenue in Q3 2022 came from its software and consulting segments. IBM’s software segment encapsulates a significant portion of the company’s hybrid platforms and solutions. With about 80% of all companies adopting some kind of cloud computing, IBM is expected to benefit from the increasing digitization of enterprises.
The following image shows IBM’s financial highlights for the third quarter of 2022.
Red Hat Acquisition Acts as Additional Leverage
We believe IBM’s acquisition of Red Hat is a great advantage for the company in the cloud for the business market. IBM looks to leverage Red Hat to establish itself as the go-to hybrid cloud platform provider. We believe the cloud platform will continue to be IBM’s ticket to growth in 2023. We expect this acquisition to enhance IBM’s position in the cloud market. IBM now offers the Linux operating system through Red Hat Enterprise Linux and a hybrid cloud platform through Red Hat OpenShift to help enterprises digitally transform. Red Hat expects to strengthen his TAM at IBM with a strong customer base including American Express, Bharti Airtel, Vodafone and Banco Sabadell.
The following chart provides an overview of IBM’s hybrid cloud and AI advancements by segment.
Dive into blockchain technology
We are excited about IBM’s position as a blockchain technology provider. The company believes it will benefit from strong adoption and wide availability on IBM Blockchain World Wire, a blockchain-driven global payments network. This network aims to accelerate and optimize cross-border payments. This means that funds can be transferred at a fraction of the cost and time compared to traditional correspondent banking. We believe this segment will be another important growth catalyst in the second half of 2023.
Risks to our bullish thesis
IBM operates in the booming cloud computing market, which exposes it to increased competition. IBM faces stiff competition from giants such as Amazon’s (AMZN)’s Amazon Web Services (AWS) and Microsoft’s (MSFT)’s Azure. The hardware enterprise server and storage segment faces competition from the likes of Dell (DELL) and Oracle (ORCL). In the IT services business, IBM faces price pressure from his HP (HPQ). IBM faces competition on all fronts, but we believe we are taking the necessary steps to support growth in 2023.
IBM is also at risk from the time-consuming nature of migrating business to the cloud. Foreign exchange volatility also remains a significant concern. The company is expected to cut costs to maintain profits based on lower revenue and higher earnings. The company ended his third quarter of 2022 with his $3.21 billion loss from continuing operations.
Despite these risks, IBM has been returning cash to shareholders for over a decade. IBM’s strong free cash flow generation is expected to provide the financial flexibility needed for strategic investments in today’s changing business environment.
stock performance
IBM is up about 6% YTD, which is not the case for most of its competitors in the technology space. The company outperformed its competitors on his YTD metric, with Dell down about 27%, Oracle down about 14%, HP down about 23%, Accenture down about 34%, Amazon down about 46%, and Microsoft down about 32%. doing. Year-to-date, IBM has also outperformed the S&P Index, down about 19%.
The following graphs show Adobe’s performance across competitors and index YTD.
evaluation
IBM thinks it’s relatively cheap. On a P/E basis, IBM is currently trading at 13.7x C2024 EPS, at $10.24 compared to its average peer group’s 17.6x. In EV/sales, IBM trades at 2.6x his C2024 sales, while the peer group average is 4.0x his. We believe IBM is a value stock and advise investors to buy the stock at current levels.
The chart below shows how IBM ranks against its peer group.
wall street words
Of the 21 analysts covering the stock, 8 are rated as buys, 10 as holds and the rest as sells. IBM is currently trading at around $140. The median target is $140, as is the average price target without potential upside. The following chart shows sell-side valuations and price targets.
what to do with stocks
We are bullish on IBM as the company outperformed estimates and peers despite macroeconomic headwinds. As the global digitization of businesses and enterprises increases, we expect the demand for hybrid cloud and AI to increase, which we believe will be a key growth catalyst for IBM. Investors are advised to buy his IBM stock at current levels.
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