Since reporting underwhelming quarterly earnings and after Warren Buffett disclosed that Berkshire sold one-third of its position, International Business Machines Corporation (IBM) is heading towards a 52-week low.
At a 12.4x P/E and 11X forward P/E, "Big Blue's" stock may attract value investors.
In the near-term, IBM faces significant headwinds. S&P just downgraded its credit rating from AA- to A+. Its outlook for the company is “negative.” Moody’s downgraded its senior unsecured rating to A1 but rated its outlook “stable.”
The lack of growth raises risks that the stock is a value trap. It is a dinosaur in the tech world. The business underperforms every quarter, hurt by its heavy weighting in maturing businesses. Faster-growing units do not add meaningfully to revenue. Until Watson and other AI-based businesses win more deals, IBM as a whole will lag other tech companies.
IBM is guiding a second-half ramp up in revenue growth. But growth from its acquisitions take time and money. The risks are elevated that management will fail in its promises for turning the company around.
Holding IBM at these levels have below-average risks. The stock pays a dividend yielding nearly 4% But if IBM closes at a yearly low, the stock will not reflect any rebound in its business this year.
Value investors will have to decide if management executes on its turnaround plan faster than markets expect.
