Buy IBM stock. The company’s turnaround is finally working

Remember when IBM had years of stagnation and declining investor returns?

Now, a successful return to International Business Machines (NYSE:IBM) finally takes hold.

For the first time in over a decade, IBM shares are rising and outperforming many of its peers. Over the past 12 months, it’s up 34%, including a 19% gain so far this year. It’s a welcome change for a stock that many analysts had written off. It was seen as a value trap that experts urged investors to avoid. Its stock is back to where it was in 2013. That was when it last peaked and then went into a decade of darkness.

The return takes hold

IBM has a storied past.

It peaked as it helped usher in the personal computer era of the 1970s and 1980s. At various times, the company was the most valuable publicly traded company in the world. It is also responsible for many revolutionary technologies. Importantly, these include the floppy disk, hard disk, and automated teller machines (ATMs) used by banks. Six of IBM’s employees have won Nobel Prizes in scientific fields.

But since the dot.com bubble burst in 2000, IBM has lost its way. It was left behind as the tech industry morphed into the internet age, which brought us smartphones, e-commerce and social media. Big Blue struggled with an outdated business model that focused largely on computer hardware and an army of information technology consultants to maintain it for third parties. But after years of failed turnaround attempts, IBM seems to have finally gotten its act together.

Spin-offs and acquisitions

A key to IBM’s success has been the 2021 spin-off of its legacy infrastructure services unit into a new publicly traded company called Kyndryl (NYSE:K.D). Kyndryl includes IBM’s previous service operations. These include IT consultants who manage customer data centers and provide traditional IT support to other companies. Thus, the spin-off freed IBM to focus on more profitable business opportunities such as cloud computing, machine learning, artificial intelligence (you) and supercomputers.

Today, IBM is the largest industrial research organization in the world and holds more patents than any other US business. Another key to the company’s success was its acquisition strategy. In 2019, IBM completed the acquisition of a software manufacturer Red Hat for $33.4 billion in what was then the largest transaction ever. Red Hat, known for software and services based on the open source Linux operating system, provided IBM with an immediate increase in cloud revenue as well as a suite of proven software products.

In April of this year, IBM announced the acquisition of the cloud software maker HashiCorp (NASDAQ:HCP) in a deal valued at $6.4 billion. HashiCorp is expected to complement IBM’s independent subsidiary Red Hat. Indeed, it has contributed heavily to IBM’s revenue growth in recent years. The HashiCorp deal is expected to close by the end of the year.

Powerful results

In late July, IBM reported second-quarter financial results that beat Wall Street forecasts, boosting analyst and investor confidence. The company reported EPS of $2.43, compared to $2.20, which was the consensus expectation among analysts. Revenue for the quarter totaled $15.77 billion, beating estimates of $15.62 billion. Management attributed the strong results to a rebound in technology spending as well as AI spending.

IBM said its book of business for generative AI now stands at more than $2 billion, up from $1 billion last April. The software company’s revenue totaled $6.74 billion at the end of the second quarter, up 7% year-over-year (YOY) and more than the consensus forecast of $6.49 billion. Looking ahead, IBM expects free cash flow in 2024 of more than $12 billion. IBM shares rose nearly 5% on news of its Q2 print.

Buy IBM stock

There was a time when it looked like IBM would never regain its mojo. The once great company seemed to have been left behind and replaced by the mega-headed tech stocks known as the “Magnificent Seven.” However, reports of IBM’s demise appear to have been premature. After a decades-long struggle, the company appears to have finally made the tough decisions and maneuvers needed to restore its business. The end result is a company that may finally be on its way back. Therefore, IBM stock is a buy.

As of the date of publication, Joel Baglole did not hold (either directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

At the time of publication, the responsible editor had (either directly or indirectly) no position in the securities mentioned in this article.