Friday, August 15, 2014

What is IBM These Days?

International Business Machines Corporation  is one of the most interesting propositions in the technology sector. The company is seeing ongoing deterioration in revenue. However, in common with its rival, Oracle Corporation , it still generates large amounts of free cash flow, and it's making aggressive investments in its growth platforms. Moreover, Oracle and IBM are both making partnerships -- witness IBM's recent deal with Apple -- in order to remain relevant in a changing IT landscape. With that said, investors are entitled to ask an existentialist question about IBM. What is it? A low-growth and highly cash-generative value play, or a company transitioning toward a becoming a long-term growth story?






IBM raises more questions than answers
First things first, IBM is not an expensive stock. The company trades on 13.3 times current earnings and less than 11 times the company's projection for non-GAAP EPS for 2014. For some value investors, that's pretty much all they need to know. Throw in the 2.4% dividend yield, and the targeted $16 billion in free cash flow for the year and it's seemingly a no-brainer.



Unfortunately, investing isn't as easy as that, and there are plenty of questions being asked about the company's plans. A chart of its segmental revenue growth reveals the extent of the revenue decline in recent years. Global technology services hasn't recorded positive year-over-year growth since the first quarter of 2012, and Global business services has only generated two quarters of (paltry) growth since the end of 2011.


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