Each week, I’ll give an overview of a stock and Licia Leslie will follow that up with a chart analysis the next day. Bill Griffo will chime in with macro analysis and Andrew Giovinazzi will then finish out the week with a volatility breakdown.
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Hey Traders,
The S&P 500 is near its high for the year.
The VIX is at a low for the year.
AI is the rage with names like MSFT and GOOGL sitting at market caps into the trillions.
While my 20 somethings wanted me to do a pot stock (4/20 HA HA HA), I firmly said no. Those companies are headed for a bad hangover.
Today, I want to look at the granddaddy of all AI names.
No it’s not some robotics company … it’s the company that beat Ken Jennings in Jeopardy and Kasparov in Chess.
That’s right…I’m talking about IBM (Ticker IBM).
IBM made a massive strategic mistake in the early 2000s when they listened to consultants and sold their hardware business.
They didn’t do the math that their clients like having consulting and hardware coming from the same place.
They also missed some of the cloud computing boom when they didn’t buy Sun Microsystems.
That being said, there are a lot of positives here.
The Good
IBM is in the cloud and is making money at it. It’s behind Amazon, Google, and Microsoft in the race – by a long shot – but they have found a customer base.
The consulting business is strong, although challenging.
They are in AI, although while Watson was the first AI, the company has not fully figured out how to monetize the system.
If IBM was smart, they would call AAPL and say “let’s team up!” That would be a juggernaut in AI and would send both stocks to new all time highs.
The security software is widely used, even if you don’t know it.
Looking at the numbers, there are some good things. 9.64 per share and the company produces 7.25 of cash flow per share. At a market cap of 2 to 1 revenue to market cap, the pricing is reasonable.
Margins are nice at 54%.
The Bad
This is IBM.
They have pivoted in the wrong direction every time in the last 20 years.
If the company had managed itself properly, it might be a top 5 market cap company in the world.
Instead it’s worth 115 billion … less than a tenth of Microsoft.
The PE is really high at 67.29.
Basically the biggest problem with IBM … is IBM culture.
The company cannot seem to get out of the way of itself.
But since 2020, IBM has new leadership … can they lead this tech bellwether out of the darkness of IBM lethargy?
The Verdict
It all comes down to the moves the company makes in the next year.
They are sitting on technology that is well ahead of ChatGPT … can they do anything with it?
Will they find a partner to bring AI to the general public?
Can IBM get out of the way of IBM?
My guess is yes.
This company is the GE of tech. If they can get it right, there’s room for earrings to explode and for the company to see a market cap more than double of where it is now.
If not … IBM is going to go back to 100.
With where the company is, I would buy.
Questions about that? Leave a comment below!
Your Only Option,
Mark Sebastian