IBM’s Stock Has More Than 10% Upside In Near Term

by Trefis Team
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[Updated 12/29/2020] IBM Update

Having lost about 8% in 2020, IBM’s stock (NYSE:IBM) has growth potential. IBM’s stock has fallen from $134 to $123 in 2020 compared to the S&P 500 which moved 15% in the same period. The company has seen a revenue fall over recent years while its EPS has risen steadily. We believe the stock has potential for nearly 10% growth in the near term, as it is expected to recover beyond $135 (the price at which it was trading at the start of the year). Our conclusion is based on a detailed comparison of IBM’s performance against the S&P 500 now as well as during the 2008 downturn in our interactive dashboard analysis, 2007-08 vs. 2020 Crisis Comparison: How Did IBM’s Stock Fare Compared With S&P 500? 

Due to the Covid-19 crisis, organizations started shifting towards the cloud which has been the sole silver lining for IBM’s revenue. All the other segments have been hit due to the pandemic. Overall, IBM saw its revenues fall by 4% in the first nine months of the year, compared to the same period in the previous year. EPS was $4.72 for the first nine months compared to $6.45 in the same period of the previous year. Further, the company reported $12.3 billion in cash inflows from operating activities for the first nine months. We expect IBM’s revenues to fall by 3.5% to $74.4 billion for 2020. Thereafter, revenues are expected to grow to $74.9 billion in 2021. 

 

[Updated 7/23/2020] Can IBM Regain Pre-Corona Level In Near Term?

IBM’s stock (NYSE:IBM) has rallied 35% since late March (vs. about 45% for the S&P 500) to its current level of $126. This is after falling to a low of $93 in late March, as a rapid increase in the number of Covid-19 cases outside of China spooked investors, and resulted in heightened fears of an imminent global economic downturn. The stock is currently about 15% below its February 2020 high of $149. Are the gains warranted or are investors getting ahead of themselves? We believe that the stock recovery is justified, and think the stock price is likely to increase marginally from its current level in the near term.

How Did IBM Fare During 2008 Downturn?

We see IBM’s stock declined from levels of around $83 in October 2007 (the pre-crisis peak) to roughly $66 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 21% of its value from its approximate pre-crisis peak. This marked a drop that was smaller than the broader S&P, which fell by about 51%.

Further, IBM’s stock recovered strongly post the 2008 crisis to about $95 in early 2010 – rising by about 44% between March 2009 and January 2010, as against the S&P which bounced back by about 48% over the same period.

In comparison, IBM’s stock lost 37% of its value between 19th February and 23rd March 2020, and has already recovered 35% since then. The S&P in comparison fell by about 34% and rebounded by about 45%.

Is The Recovery Warranted & Can We Expect Further Gains?

The rally across industries over recent weeks can primarily be attributed to the Fed stimulus which largely quieted investor concerns about the near-term survival of companies. The flattening of Covid cases in the worst hit U.S. and European cities is also giving investors confidence that developed markets have put the worst of the pandemic behind them.

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending, which would lead to lower demand for software, hardware, and web services affecting IBM’s revenues. That said, the company is also well poised to benefit from the growing number of people globally who are working from home thanks to its portfolio of software as well as services aimed at remote collaboration. For Q2 2020 the company saw a fall in overall revenue by 5% y-o-y, though the Cloud & Cognitive segment saw a growth of 3% in the quarter.

 

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. With investors focusing their attention on 2021 results, the valuations become important in finding value.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

 

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