IBM shares outperformed the tech sector in 2022

IBM is not often described as an attractive company. But in a year in which investors dumped all major tech stocks, Big Blue was in the green.

The Nasdaq is closing its worst year since 2008. High gasoline prices, skyrocketing inflation and the Federal Reserve’s steady pace of rate hikes have punished growth stocks and favored more mature, less volatile names seen as more recession-resistant.

Tech names that thrived during the COVID-19 the days that suffered the most as the economy reopened and consumers returned to many of their old habits.

Among US tech companies valued at $50 billion or more, IBM was one of only two to deliver positive returns in 2022. As of Friday’s close, shares were up 6% on the year. The other winner is vmwarewhich rises 5% because it agreed in May to be acquired by broadcom for $61 billion.

Time Goal, Amazon Y tesla been hit, investors turned to 111-year-old IBM, betting on its steady earnings, along with energy stocks like exxonmobilhealthcare names including Merck and industrial Northrop Grumman Y Lockheed-Martin.

IBM is “trading well above its historical range,” Bernstein Research analysts wrote in a Dec. 20 note to clients. The company has a hold-for-action rating.

No one will mistake IBM for a growth stock. Expansion is consistently in the single digits, and last year the company spun off Kindergarten, its managed infrastructure services business, into a separate publicly traded entity. That brought the people count down by around 90,000.

But IBM generated $752 million in free cash flow in the last quarter, up 25% from a year earlier, and paid $1.5 billion in dividends. third quarter earnings and revenue beat estimates, and the company raised its full-year forecast.

Crawford Investment Counsel in Atlanta, which focuses on income and dividends, looked at IBM in 2016 and concluded it would be too soon for a major investment, he said. aaron foremanstock analyst for the firm.

Crawford’s thesis changed in 2019, after IBM bought fastest growing Red Hat for $34 billion. The company, which today manages $6.7 billion, increased its stake in IBM from $2 million to $30 million and kept buying until its holdings reached $109 million.

IBM took a hybrid approach to the cloud under CEO Arvind Krishna, who succeeded Ginni Rometty at the helm in 2020. After striving to gain scale as a cloud infrastructure provider, the company bet on companies using data center infrastructure on-premises as well as the public cloud, rather than completely relying on one approach or the other.

“Three years later, it’s much closer to his vision than anything else in the public cloud,” Foresman said. His firm sold 3% of his shares in the second and third quarters of this year.

Consulting is still a big part of IBM’s business, accounting for a third of revenue. In that realm, IBM partners with the big cloud providers, rather than strictly competing with them. The company has a backlog of business with Microsoft worth more than $1 billion, and an even bigger one with Amazon, Krishna said in a conversation with RBC CEO Dave McKay in November.

IBM also made technological breakthroughs in 2022, introducing the of 16 mainframe computer. When a new mainframe comes along, many customers upgrade. That leads to higher revenue from highly cost-effective transaction processing hardware and software to run on the machines. IBM’s previous mainframe boom cycle began in September 2019.

While IBM has steered clear of any flashy, high-priced acquisitions this year, it has announced some smaller deals to enhance certain capabilities. Earlier this month, IBM agreed to buy Octo, a Virginia-based consulting firm that targets government agencies. Terms were not disclosed. It also absorbed consulting companies dialexa Y sit down this year.

Foresman described the purchases as an appropriate use of capital and “so small that they don’t necessarily reveal multiples of transactions.”

Still, Krishna acknowledges that the economic context is not ideal. He said in October that higher prices have led to “some caution in talks” in Europe, where the company has to prepare for a recession. In the Americas, where IBM gets about 53% of revenues, the business climate is “very strong,” he said.

Bernstein analysts said the direction of the stock from here could simply depend on the state of the economy, rather than any major catalyst within the company.

“Given its defensive characteristics and historical performance, we believe IBM is likely to do well if we continue to pressure markets, and is likely to lag major indices if we enter a recovery period,” they wrote.

from IBM model through 2024 requires mid-single-digit revenue growth, which translates to high-single-digit free cash flow growth.

That’s good enough for investors looking for security in their equity bets.

“Combined with mid-single-digit revenue growth, a couple points better than that in EPS, and a 5% dividend yield is — you know, that’s not a home run, but it’s within our expectations of what we’re trying to achieve,” Foresman said.

WATCH: Technology is a deflationary response to today’s macro struggles, says IBM CEO Arvind Krishna