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Trading On The Floor Of The NYSE Boring Week In Stocks Masks Roaring Appetite For U.S. Hedges
A monitor displays International Business Machines Corp. (IBM) signage on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Monday, Nov. 20, 2017.
Michael Nagle—Bloomberg via Getty Images

International Business Machines is considered by many investors to be "old tech" — a reputation reinforced by the fact that the technology services giant has posted only one quarter of revenue growth in the past five years.

Big Blue's stock has also been a big laggard in the market during this stretch, losing about one-fifth of its value at the same time tech shares in general have more than doubled in price.

But don't be surprised if IBM catches investors off guard and starts to post exceptional returns in the coming years, riding a growth wave that could be generated by its market leading positions in two of the hottest trends of the "new economy" — blockchain technology and the cloud.

So far, Wall Street has largely ignored IBM's dominance in blockchain technology — digitized public ledgers that record transactions and serve as the backbone of cryptocurrencies such as Bitcoin.

This is ironic, because armchair speculators and cryptocurrency bulls have been willing to drive up the share prices of obscure, micro-cap companies that have morphed their business models from things like iced tea and animal care and biotechnology to include blockchain.

Once the Bitcoin bubble bursts, though, market participants will likely come to their senses, with capital rotating into more potent long-term opportunities.

IBM should thrive once that transition gets underway. Here's why:

IBM is the no. #1 ranked leader in blockchain

IBM was ranked the No. 1 leader in blockchain technology in a September survey of 400 executives, managers, and IT leaders by Juniper Research, a digital commerce and financial technology research firm.

Of those businesses “actively considering” or “in the process of deploying” blockchain technology, IBM was ranked first by 43%, with Microsoft coming in a distant second at 20%.

IBM is currently engaged in major blockchain research and development initiatives that include its participation in the open source Hyperledger and has already built an impressive portfolio of Fortune-500 clients across diverse industries.

That technology will provide the core for hundreds of business applications in coming years, although developers advise there are no plans to enter the promising but volatile field of cryptocurrencies.

Earnings Growth is Returning

IBM beat Wall Street analysts' earnings and revenue estimates in the fourth quarter of 2017 and now expects 2018 operating earnings of at least $13.80 per share.

More importantly, the company reported year-over-year revenue growth for the first time in 23 quarters.

Revenues from new technologies rose 11% year over year and 17% for the quarter, now contributing 46% of the company’s total sales. Cloud revenues also continued their impressive growth, contributing $17-billion in the last 12 months, up 24% on a year-over-year basis.

IBM senior vice-president and CFO James Kavanaugh confirmed the company’s long-term commitment to fast-growing cloud and blockchain initiatives in the company's quarterly release, noting “2018 will be all about reinforcing IBM’s leadership position in key high-value segments of the IT industry, including cloud, AI, security and blockchain.”

Taken together, the company may have finally shaken off its sloth-like reputation and is poised to embark on a positive growth trajectory.

Despite upbeat results, the stock dropped after IBM released quarterly earnings because 2018 market players are narrowly focused on long-term lead. The reversal highlights the need for patient discipline and a multiyear investment horizon to benefit from the company’s blockchain and cloud dominance, which will take more time to fully develop.

The case for buying the stock now

What’s the argument for buying the stock now, while it's still struggling, instead of waiting for another batch of quarterly results? Clearly it’s a contrarian play, requiring patience (and some faith) that emerging growth trends will continue to develop while IBM leverages blockchain and cloud dominance into rising profits.

However, the stock is also very cheap relative to its peers, offering greater long-term upside potential. In early February, the stock was trading at a price/earnings ratio of 11.7, based on projected earnings over the next 12 months. That's 40% cheaper than the broad market.

Yet the stock is also trading well off the deep lows posted in 2016 and 2017, quietly attracting value-oriented investors.

More importantly, better-performing rivals have hit overbought technical readings after months of higher prices, increasing the odds that they’ll top, potentially leading to a correction.

IBM is less vulnerable to a downturn because, unlike its peers, its stock hasn’t posted a new high in the last five years, remaining stuck within a long-term trading range. That could change as soon as Wall Street is convinced that Big Blue’s short-term growth metrics are sustainable in the long run.

The Bottom Line

The market is undervaluing IBM’s blockchain dominance, even though it is likely to contribute to a growth resurgence following a long period of mediocre results.

State-of-the art cloud technology should intensify this growth curve, lifting Big Blue higher.