IBM stock outperformed technology sector in 2022

IBM Not often described as a hot company. But Big Blue was blue in a year when investors abandoned all major tech stocks.

Nasdaq closes trading worst year Rising gas prices, soaring inflation and steady Federal Reserve interest rate hikes took a toll on growth stocks, favoring more mature, less volatile stocks seen as recession-proof.

Technology name that flourished in the times COVID The days suffered the most as the economy reopened and consumers reverted to many of their previous habits.

Among US technology companies valued at more than $50 billion, IBM is one of only two to generate positive returns so far in 2022.the other winners VMwareis up 5% as it agreed to be acquired in May. broadcom at $61 billion.

in the meantime meta, Amazon When Tesla Investors turned to the 111-year-old IBM, betting on its stable earnings, and betting on energy stocks such as: exxon mobila healthcare name containing Merck and industry Northrop Grumman When lockheed martin.

Bernstein Research analysts wrote in a note to clients dated Dec. 20 that IBM is “trading well above its historical range.” The company has a hold rating on the stock.

No one would mistake IBM for a growth stock.Growth consistently in single digits, company spun off last year kindril, spun off its managed infrastructure services business into a separate publicly traded company. This has saved about 90,000 people.

However, IBM generated free cash flow of $752 million in its most recent quarter, up 25% from the year-ago quarter, and paid out a $1.5 billion dividend. Earnings in the third quarter and revenue both beat estimates, prompting the company to raise its full-year forecast.

Atlanta’s Crawford Investment Counsel, which focuses on income and dividends, investigated IBM in 2016 and concluded that it was too early to make a large investment. Aaron Foresmanthe company’s equity analyst.

Crawford’s paper changed in 2019 after IBM. Acquisition of fast-growing Red Hat at $34 billion. The company, now worth $6.7 billion under management, increased its stake in IBM from his $2 million to his $30 million and continued to buy until its holdings reached his $109 million.

IBM is hybrid approach In 2020, it moved to the cloud under CEO Arvind Krishna, succeeding Ginni Rometty. After struggling to scale as his cloud infrastructure provider, the company bet that companies would use on-premises data center infrastructure as well as public his cloud. Than rely entirely on either approach.

“Three years later, we are much closer to their vision than anything on the public cloud,” Foresman said. His company sold his 3% stake in the second and third quarters of this year.

Consulting remains a big part of IBM’s business, accounting for one-third of its revenue. In that area, IBM partners with the big cloud providers rather than strictly competing with them. The company microsoft It’s worth more than $1 billion and even more at Amazon, Krishna said in a conversation with RBC CEO Dave McKay in November.

IBM will also make technological breakthroughs in 2022, z16 mainframe computer. Many clients upgrade when new mainframes come out. This increases the revenue of the hardware and leads to high profit transaction processing software running on the machine. IBM’s previous mainframe boom cycle began in September 2019.

While IBM didn’t dabble in flashy, expensive acquisitions this year, it did announce some smaller deals to enhance certain features. Earlier this month, IBM agreed Acquires Octo, a Virginia-based consulting firm that serves government agencies. Terms were not disclosed.Acquired a consulting firm dialexa When Sentaka this year.

Acquisitions are a good use of capital, Foresman said, “because they’re so small, we don’t necessarily disclose deal multiples.”

Yet Krishna recognizes that his financial background is not ideal. He said in his October increase in prices was leading to “a wariness creeping into the conversation” in Europe, where the company has to brace for a recession. He said the business environment is “very strong” in the Americas, where IBM gets about 53% of its revenue.

Analysts at Bernstein say the direction of the share price from here on out could depend solely on the state of the economy rather than the key internal catalysts.

“Given its defensive nature and past performance, we think IBM is likely to do well if the market continues to hold pressure, and likely lag behind key metrics as it enters a recovery period.” they write.

IBM’s model Mid-single-digit earnings growth is required through 2024, leading to high-single-digit free cash flow growth.

For investors looking for safety in their stock investments, this is more than enough.

“Combined with mid-single-digit earnings growth, a few points better than EPS and a 5% dividend yield. It’s not a home run, but it’s within expectations of what we’re trying to achieve,” Foresman said. I was.

look: Technology is the deflationary solution to today’s macro struggles, says IBM CEO Arvind Krishna.