This 1 Tech Stock Could Become the Next Microsoft

International Business Machines Corporation (IBM) is a technology company that operates as a global integrated solutions and services provider. The company functions through the four broad business segments: Software; Consulting; Infrastructure; and Financing. It has a $116.22 billion market capitalization.

On the other hand, Microsoft Corporation (MSFT) is a software behemoth providing software services, solutions, and devices worldwide. It has a $1.94 trillion market capitalization.

IBM is gaining traction in its cloud business and making some analysts believe that it is on the path to becoming the next MSFT. IBM Cloud is a suite of cloud computing services that offers a platform as a service (PaaS), infrastructure as a service (IaaS), and software as a service (SaaS). IBM Cloud has a stack of 170 products and cloud services for B2B organizations.

MSFT’s public cloud ecosystem is called Azure, which offers a set of cloud services that enable customers to build, manage and deploy applications. The company also offers cloud services such as Microsoft Dynamics, Microsoft Office 365, and Microsoft OneDrive.

IBM’s stock has gained 6.9% over the past six months and 0.9% intraday to close its last trading session at $129.66.

Here are the factors that could influence IBM’s performance in the near term:

Solid Bottom-line Growth

For the fiscal second quarter that ended June 30, IBM’s total revenue increased 9.3% year-over-year to $15.54 billion. Non-GAAP gross profit rose 5.5% from the prior-year quarter to $8.47 billion. Non-GAAP income from continuing operations and non-GAAP EPS from continuing operations improved 44.6% and 43.5% from the same period the prior year to $2.11 billion and $2.31.

Cheap Valuations

In terms of its forward non-GAAP P/E, IBM is trading at 13.86x, 24.4% lower than the industry average of 18.34x. Its forward Price/Sales multiple of 1.95 is 29.8% lower than the industry average of 2.77. In terms of its forward Price/Cash Flow, IBM is trading at 9.46x, 44.9% lower than the industry average of 17.18x.

Impressive Profitability Margins

IBM’s trailing-12-month EBITDA margin and net income margin of 20.37% and 9.36% are 55.9% and 120.4% higher than their respective industry averages of 13.07% and 4.25%. Its trailing-12-month ROE, ROTC, and ROA of 27.22%, 5.33%, and 4.38% are 273.6%, 34.5%, and 58.6% higher than their respective industry averages of 7.28%, 3.96%, and 2.76%.

POWR Ratings

IBM has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

IBM has a Quality grade of B in sync with its impressive profit margins.

In the 82-stock Technology – Services industry, it is ranked #24.

Click here to see the additional POWR Ratings for IBM (Growth, Value, Momentum, Stability, and Sentiment).

View all the top stocks in the Technology – Services industry here.

Bottom Line

IBM is growing significantly in the cloud business. Moreover, analysts expect the company’s bottom line to grow 9.7% per annum over the next five years. Although it might be wise to wait for a better entry point in the stock, IBM looks like a long-term play.

How Does International Business Machines Corporation (IBM) Stack Up Against Its Peers?

While IBM has an overall POWR Rating of C, one might consider looking at its industry peers, Celestica Inc. (CLS) and Jabil Inc. (JBL), which have an overall A (Strong Buy) rating, and Science Applications International Corporation (SAIC) and Leidos Holdings, Inc. (LDOS), which have an overall B (Buy) rating.

IBM shares were trading at $130.48 per share on Friday morning, up $0.82 (+0.63%). Year-to-date, IBM has gained 1.25%, versus a -14.97% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More…

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