Insights

Why IBM Stock Outperformed in April

What happened
April was a rough month for the stock market as a whole, but International Business Machines (NYSE: IBM) managed to buck the trend. While the S&P 500 was down 8.8% for the month, a strong earnings report pushed IBM stock up 1.7%, according to data provided by S&P Global Market Intelligence.
With IBM’s managed infrastructure services business no longer dragging it down, solid demand for software and consulting helped the century-old tech giant beat analyst estimates for both revenue and earnings.
Image source: Getty Images.

So what
IBM spun off its managed infrastructure services business as Kyndryl late last year, removing around $19 billion of slow-growing revenue. The company can now focus its attention on its best long-term growth opportunities, which include hybrid cloud computing and artificial intelligence.
IBM can tap into the growth of hybrid cloud computing in multiple ways. The company’s hybrid cloud platform, built on Red Hat technology, can run on top of popular public clouds like AWS, on-premises enterprise infrastructure, and IBM’s own mainframes and Power servers. This platform is augmented by IBM’s portfolio of software products that tackle data analytics, AI, automation, transaction processing, security, and other critical applications.
IBM’s software segment produced $5.8 billion in revenue for the first quarter, growing by 15% adjusted for currency. More than 4,000 customers are now using the company’s hybrid cloud platform, and Red Hat products enjoyed 21% growth during the quarter. Some of this growth was due to sales to Kyndryl, but demand was strong regardless.
On top of software, IBM provides consulting services to large enterprises plotting a path to the cloud. Consulting was a $4.8 billion business for IBM in the first quarter, with sales rising by 17% year over year. Growth was driven by a combination of strong demand for hybrid cloud and partnerships with other tech companies, including SAP and Adobe.
Good results for the software and consulting segments led to $14.2 billion in total revenue for the quarter, ahead of the average analyst estimate by $360 million. Adjusted earnings per share of $1.40 edged out estimates by a penny.
Now what
IBM expects 2022 to be a year of growth. Revenue should be up a mid-single-digit percentage adjusted for currency, with an additional 3.5-percentage-point boost from sales to Kyndryl. Free cash flow is expected to be between $10 billion and $10.5 billion.
One reason IBM stock performed well in April could be valuation. IBM is valued at around $120 billion, or roughly 12 times free-cash-flow guidance. Clearly, the market doesn’t yet believe the company’s growth story. If IBM can produce sustainable, consistent growth in its leaner, more focused form, outperformance could become a common occurrence for the beaten-down stock.
Timothy Green has positions in IBM and Kyndryl Holdings, Inc. The Motley Fool has positions in and recommends Adobe Inc. The Motley Fool recommends SAP SE and recommends the following options: long January 2024 $420 calls on Adobe Inc. and short January 2024 $430 calls on Adobe Inc. The Motley Fool has a disclosure policy. –

What happened

April was a rough month for the stock market as a whole, but International Business Machines (NYSE: IBM) managed to buck the trend. While the S&P 500 was down 8.8% for the month, a strong earnings report pushed IBM stock up 1.7%, according to data provided by S&P Global Market Intelligence.

With IBM’s managed infrastructure services business no longer dragging it down, solid demand for software and consulting helped the century-old tech giant beat analyst estimates for both revenue and earnings.

Image source: Getty Images.

So what

IBM spun off its managed infrastructure services business as Kyndryl late last year, removing around $19 billion of slow-growing revenue. The company can now focus its attention on its best long-term growth opportunities, which include hybrid cloud computing and artificial intelligence.

IBM can tap into the growth of hybrid cloud computing in multiple ways. The company’s hybrid cloud platform, built on Red Hat technology, can run on top of popular public clouds like AWS, on-premises enterprise infrastructure, and IBM’s own mainframes and Power servers. This platform is augmented by IBM’s portfolio of software products that tackle data analytics, AI, automation, transaction processing, security, and other critical applications.

IBM’s software segment produced $5.8 billion in revenue for the first quarter, growing by 15% adjusted for currency. More than 4,000 customers are now using the company’s hybrid cloud platform, and Red Hat products enjoyed 21% growth during the quarter. Some of this growth was due to sales to Kyndryl, but demand was strong regardless.

On top of software, IBM provides consulting services to large enterprises plotting a path to the cloud. Consulting was a $4.8 billion business for IBM in the first quarter, with sales rising by 17% year over year. Growth was driven by a combination of strong demand for hybrid cloud and partnerships with other tech companies, including SAP and Adobe.

Good results for the software and consulting segments led to $14.2 billion in total revenue for the quarter, ahead of the average analyst estimate by $360 million. Adjusted earnings per share of $1.40 edged out estimates by a penny.

Now what

IBM expects 2022 to be a year of growth. Revenue should be up a mid-single-digit percentage adjusted for currency, with an additional 3.5-percentage-point boost from sales to Kyndryl. Free cash flow is expected to be between $10 billion and $10.5 billion.

One reason IBM stock performed well in April could be valuation. IBM is valued at around $120 billion, or roughly 12 times free-cash-flow guidance. Clearly, the market doesn’t yet believe the company’s growth story. If IBM can produce sustainable, consistent growth in its leaner, more focused form, outperformance could become a common occurrence for the beaten-down stock.

Timothy Green has positions in IBM and Kyndryl Holdings, Inc. The Motley Fool has positions in and recommends Adobe Inc. The Motley Fool recommends SAP SE and recommends the following options: long January 2024 $420 calls on Adobe Inc. and short January 2024 $430 calls on Adobe Inc. The Motley Fool has a disclosure policy.

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