IBM’s first record since 2013 as AI optimism fuels 19% rally

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(Bloomberg) — One of tech’s oldest companies is quietly avoiding the hottest stocks on Wall Street.

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International Business Machines Corp. recently hit its highest level since 2013, putting it about 6 percent below an all-time high as investors bet that years of strong growth and share prices After the comeback, the change is finally paying off. Compared to the Magnificent Seven, IBM’s nearly 19% growth this year, including profits, trails only Nvidia Corp. and Meta Platforms Inc.

“IBM has been discounted by the rest of the industry, but it has invested heavily in both cloud and AI, and with a strong AI business, we can see growth being more impactful,” said Jethro Townsend, New Impact. portfolio manager said. capital He cites the firm’s cash flow generation and “healthy” dividend yield as factors that provide scope for a re-rate.

Much of the year’s advance followed IBM’s results in late January, when it posted better-than-expected forecasts for both free cash flow and revenue and said it was seeing growing demand for its AI products. Is. The company has also cut jobs and expects to stop hiring for roles that could be replaced by AI, seen as a potential tailwind for margins.

The stock fell 0.3 percent on Wednesday.

The increase is a recent trend, however; While Apple Inc. has lagged this year, its five-year total return of 275% is stronger than IBM’s 82% gain over the same period.

Wall Street is divided, with bulls outnumbering skeptics and bears, according to data compiled by Bloomberg. While that looks cheap compared to most big tech stocks, IBM’s estimated multiple of 19 times earnings is the highest it’s been in 20 years. Additionally, among the worst-performing components of the S&P 500 tech index, the stock is 4% above the average price target.

Still, the company offers something that’s rare among big tech: a strong dividend. The implied yield is 3.43%, much higher than others in the sector. Apple Inc. and Microsoft Corp. The implied yield for is less than 1%, and while Nvidia pays a dividend, the yield is essentially non-existent.

That’s not enough to entice bulls ahead of IBM’s growth potential, which is expected to remain well below megacaps. Revenue is expected to grow at a single-digit pace for the next several years, compared to double-digit expansion for other AI-affiliated companies like Microsoft or Alphabet Inc. Its latest report failed to meet expectations. While consensus estimates for the company’s 2024 net income are up 4.4 percent from the previous quarter, the revenue outlook has barely budged, according to data compiled by Bloomberg.

“The CEO has done a valiant job of turning the company around, but it’s just generally slow growth, and it’s not cheap compared to those modest prospects,” said David Katz, chief investment officer at Matrix Asset Advisors. That he may be attracted to himself.” . “We can easily do better elsewhere.”

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In a measure of how tech is being driven by its largest companies, the index of small-cap tech stocks is down 7% this year as of its last close, making it the best-performing of other size categories. is dramatically underperforming. The S&P 500 tech sector index, which tracks large-cap tech stocks, is up 12% in 2024. However, the mid-cap tech index has been the best performer with a gain of 14%.

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Income is due on Wednesday.

(Updates as market opens.)

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