International Business Machines Corporation (IBM) is a veteran in the technology space. Founded in 1911, the company has been a part of almost all technology innovations. Its former CEO, Sam Palmisano, created IBM’s most celebrated business model, a one-stop technology solution (hardware, software, and associated services) for all business needs.
But in the last seven years, IBM stock has declined. It fell 45% over the past seven years, with its revenue declining 17 straight quarters. It lost $23 billion in revenue between 2010 and 2019, and is expected to lose another $3 billion this year.
Behind IBM’s multi-year declines
IBM is a leader in IT consulting services. The technology industry, and IT services specifically, has transitioned to artificial intelligence (AI) & automation, cybersecurity, and cloud-based solutions. Traditional IT consulting has slowed and market leaders like IBM and Accenture plc (ACN) have felt the impact.
IBM was slow to pick up the transition to higher-growth hybrid cloud and AI businesses. The growth from these new businesses was slightly offset by declines and slower growth in IT services. Hence, IBM’s revenue started to decline.
Now, the company has a new CEO and a fresh management perspective. Arvind Krishna took over as IBM’s CEO in April, and he has made a bold move to split the company. IBM will retain its cloud and AI businesses, and spin-off of its weaker IT services unit into a new company. His idea is that a slim downed company will help IBM grow faster.
On one hand, the new IBM will extensively be able to tap into the $1 trillion hybrid-cloud market opportunity and earn over 50% from recurring revenues. It is also making acquisitions to strengthen its cloud services. Its biggest acquisition was Red Hat for $34 billion. On the other hand, the new company will focus on managing and modernizing infrastructures with its IT services, which represents a $500 billion market opportunity. This split is expected to be completed next year.
A split is perhaps an appropriate approach, rather than sitting idle. But it is difficult to say if the split can unlock the next level of growth for IBM and how it will impact shareholders. Wall Street analysts are divided between Buy and Hold. Even IBM is a “Neutral” according to our POWR Ratings.
It also has an “C” for Trade Grade and Buy & Hold Grade and a “D” for Peer Grade. It’s ranked #13 out of 30 Technology – Hardware stocks.
The only reason why investors hold IBM stock is because of its rich 25-year history of incremental dividends. Even during the pandemic, it has increased its dividends and now has a dividend yield of 5.58%.
If dividends are what you are looking for, IBM is the stock for you. But if you’re looking for long-term growth, forget IBM and consider betting on ACN, Fiserv, Inc. (FISV), and Infosys Limited (INFY). While IBM’s growth is stagnated, these tech giants are growing steadily. They are enjoying higher profits, which many new high-growth cloud companies lack.
Accenture plc Class A Ordinary Shares (Ireland) (ACN)
Ireland-based ACN competes directly with IBM in IT consulting services. But unlike IBM, ACN transitioned more efficiently from the slower-growth IT services markets, and expanded in the higher-growth digital, cloud, and security markets. Between 2016 and 2020, ACN increased its revenue exposure to these new businesses from 40% to 70%.
ACN accelerated this transition by acquiring several smaller companies. Moving with the tide helped it fare better than many of its industry peers. In the last seven years, IBM stock dipped 45% on the back of declining revenues, whereas ACN stock surged 196% on the back of revenue growth.
While IBM has lost more than $20 billion in revenue over the last decade, ACN has more than doubled its revenue from over $18 billion in 2010 to $44.3 billion in 2020. Its revenue surged 3% year-over-year in fiscal 2020, driven by robust demand for its cloud, digital, and security services. Analysts expect ACN’s revenue to surge by 5.3% in fiscal 2021. Whereas they expect IBM’s revenue to surge by 1.2% next year, after falling 4.1% this year.
Hence, ACN is rated a “Strong Buy” in the POWR Ratings. It holds straight “As” in Trade Grade, Peer Grade, and Buy & Hold Grade and a “B” in Industry Rank. It is also the #1 ranked stock in the Outsourcing – Tech Services industry.
Fiserv, Inc. (FISV)
While ACN and IBM offer a wide range of IT and business consulting services, FISV focuses purely on financial technology and services. It offers electronic payment processing, retail point of sale (POS), internet banking, and e-commerce services to merchants, banks, and capital market firms. It earns revenue through transaction-based fees from contracts.
The growing adoption of digital transactions is driving growth in the fintech sector. Its revenue has been growing low to mid-single-digit over the past five years. Last year, it acquired First Data, which doubled its revenue from $5.8 billion to $10 billion. The COVID-19 pandemic hit FISV in the second quarter, when its revenue fell 12% year-over-year, as many merchants closed their stores. Hence, the stock fell 2.2% year-to-date after rising 57% last year.
But the pandemic also accelerated the adoption of digital payments. Hence, FISV’s third-quarter revenue fell just 1%. The digital payment trend will be reflected in its earnings next year and drive up its stock. Analysts expect FISV’s revenue to fall 2.7% this year and surge 7.2% next year.
FISV stock is rated “Buy” in our POWR Rating system. It also has an “A” for Trade Grade and a “B” for Buy & Hold Grade, Peer Grade, and Industry Rank. In the 236-stock Financial Services (Enterprise) industry, it is ranked #24.
Infosys Limited (INFY)
India-based consulting and outsourcing giant INFY has enjoyed steady growth in the last decade. The company has accelerated its transition to digital services over the past few years. Its revenue surged from $7 billion in fiscal 2012 (ended March 2012) to $12.8 billion in fiscal 2020.
In fiscal 2020, INFY’s revenue surged 8.3% year-over-year, driven by 37% growth in digital revenue, which now contributes around 40% towards its revenue. The pandemic slowed its growth in the first quarter of fiscal 2021 as clients in every industry lowered their orders amid business uncertainty.
However, INFY saw demand return, especially for cloud virtualization, workforce transformation, and cost reduction programs. Hence, INFY stock fell 37% during the March sell-off, but returned to a rally, gaining 47% year-to-date.
Analysts expect INFY’s revenue to surge by 3.4% in fiscal 2021 and continue its stable growth. INFY stock is rated a “Buy” in our POWR Ratings system. It also has an “A” for Trade Grade and a “B” for Buy & Hold Grade and Industry Rank. In the 14-stock Outsourcing – Tech Services industry, it is ranked #5.
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IBM shares were trading at $118.67 per share on Monday morning, up $1.73 (+1.48%). Year-to-date, IBM has declined -6.82%, versus a 12.05% rise in the benchmark S&P 500 index during the same period.
About the Author: Puja Tayal
Puja is a seasoned writer working with financial publishing companies like Motley Fool Canada and Market Realist. With over 13 years of experience in the field of fundamental research, she brings a blend of comprehensive, well-researched insights into her articles. More…