People investing in International Business Machines (IBM 0.01%) stock are buying a business vastly different from the one founded a century ago. In the beginning, the company focused on punch cards used to manually process data, including tabulating Census records.
But over the years, it gradually diversified into a plethora of seemingly unrelated business ventures, including the well-known Weather Channel. However, this is changing.
Today, IBM is narrowing its focus to hybrid cloud computing, artificial intelligence (AI), and quantum computing. Now that it's focused on these more exciting industries, investors naturally want to know how to benefit from these trends by investing in IBM stock. Keep reading to find out more.
How to buy
How to buy IBM stock
Before discussing IBM's modern-day business, it's necessary first to explain how to invest in stocks. Whether buying IBM stock or shares of another publicly traded company, the general step-by-step process will be the same.
Step 1: Open a brokerage account
The easiest way to buy stocks is to have a brokerage account. Opening a brokerage account is the first step in the process. Many modern brokerages offer online trading, zero fees, and the ability to purchase fractional shares. These are great features to look for when choosing a brokerage firm.
Step 2: Determine an investment budget
No amount is intrinsically too much or too little. The budget just needs to be within one's means. Investing too much money in the stock market can be a recipe for financial hardship because stock returns are volatile. A financial need could force unprepared investors to sell stocks at the worst possible time and lock in losses.
Step 3: Do your research
For a business like IBM, research should include the competitive landscape, potential competitive advantages, its revenue growth rate, the stock's valuation, and more. For alternative investment products, such as exchange-traded funds (ETFs), research should also include fees and past performance.
Step 4: Place your order
The final step of investing in stocks is placing an order. The process for each brokerage will look slightly different. Below is a screenshot of what it looks like to place an order on Fidelity's popular brokerage platform.
When placing an order, brokerages commonly ask for certain information. Generally speaking, investors need to select the account they're trading from, input the desired ticker symbol (in this case, IBM), specify whether the trade is for a certain number of shares or a certain dollar amount, and choose whether the order is a limit order or a market order.
Market orders will go through at whatever the investment's price is at the moment the trade is placed. By contrast, limit orders can be set up to go through if the investment hits a desired price. For limit orders, investors also must signal whether they want the order to stay open unless it's canceled manually. Otherwise, the order will be canceled automatically if it doesn't go through that day.
Should I invest?
Should I invest in IBM?
Selecting individual stocks for one's own portfolio is a personal process, so it's impossible to answer this question definitively. The future is uncertain. Investing in IBM stock today involves individualized opinions of where the world is headed and how IBM is positioned to capture the opportunity and reward shareholders.
IBM stock has dramatically underperformed the S&P 500 over the last decade, even when accounting for the boost provided by dividends. Some investors may wish to avoid IBM stock altogether because of its underwhelming track record. However, that may be an unfair way to approach this investment today. IBM has completely reimagined its business in recent years and, consequently, deserves a fresh look.
IBM is now focused on hybrid cloud computing -- including quantum computing -- and AI. To demonstrate its commitment to these areas, management has divested parts of the business that don't align with its new vision.
In 2021, IBM spun off infrastructure business Kyndryl (KD 4.0%) into its own company, divesting a large but low-margin part of its business. Then, in 2022, the company sold its healthcare software assets for about $1 billion. And in 2023, it even sold The Weather Company, which owns The Weather Channel.
By trimming down, IBM is leaning into the cloud and AI trends, which appear to have strong tailwinds. According to a 2024 study by International Data Corporation (IDC), spending on public cloud services is expected to reach $1.6 trillion by 2028, growing at an almost 19% compound annual growth rate (CAGR). Based on a separate study, IDC expects an even better CAGR of 29% for AI spending as it marches toward becoming a $600 billion market by 2028.
Management believes large enterprises will not adopt a single public cloud provider or use a single AI model. Rather, it firmly believes the future involves a hybrid approach to both. Its software, consulting, and infrastructure businesses are all geared toward helping enterprises adopt whatever cloud and AI solutions they want.
IBM also has ongoing work in microchip design, seeking to build semiconductor solutions that are faster and more energy efficient, which is crucial for the AI trend.
IBM's journey to achieve its vision hasn't been as easy as simply divesting assets that are no longer core. The company has also been on an acquisition spree in recent years. In 2022 and 2023 combined, IBM acquired 17 companies for a total price of almost $8 billion. In the first half of 2024, it acquired two more companies for an additional $278 million.
IBM is chasing some important secular trends, which could ultimately be rewarding for shareholders. That said, completely reimagining the business through a series of acquisitions and divestitures can be a complicated strategy to pull off.
Profitability
Is IBM profitable?
IBM is a profitable business, continually reporting net income on a trailing-12-month basis for over 30 years. Still, IBM's financials deserve a fresh look, considering all the changes it's undergone in recent years.
IBM's best revenue growth lately has been in its software business. This is fortunate because software also accounted for roughly two-thirds of IBM's profits in the first half of 2024. In other words, there's good reason to believe the company's overall profits can grow because its best growth supplies most of the profits.
As IBM's software business continues to take off, the company's cash flows are improving. However, investors do need to be aware that some of these cash flows are being poured right back into the business for research and development and acquisitions.
IBM is adapting its business to better address the global growth trends in cloud and AI. That's probably a good mindset for management to have. However, these spaces are highly competitive and subject to rapid changes as technology advances at breakneck speeds. It's imperative to spend money to stay ahead of the curve, a common need for tech stocks.
In summary, IBM is a profitable business, and its future cash-flow potential is promising. However, investors must be aware that the company could find itself spending more money than anticipated just to stay relevant in a rapidly advancing world.
Dividends
Does IBM pay a dividend?
IBM stock has a long history of paying dividends. It's paid a dividend every quarter for more than a century. Adjusting for stock splits, the dividend was increased for the 29th consecutive year in 2024, landing IBM in elite company.
As of this writing, IBM paid dividends of $6.68 per share annually ($1.67 per share quarterly), which amounts to a 3.3% dividend yield based on the stock's current trading price. This puts IBM stock in high-yield dividend stock territory.
ETF options
ETFs with exposure to IBM
There's a good chance many investors are more interested in investing in the AI trend than in IBM stock itself. It's also quite possible that investors want to buy IBM stock only for its high-yield dividend. For those investors, buying an ETF might be a better option. ETFs hold multiple stocks based on a theme, giving investors instant diversification in their specific areas of interest.
For example, there's the First Trust Nasdaq Technology Dividend Index Fund (TDIV 1.27%) for investors interested in IBM's high-yield dividend. At 9.4% of the portfolio's value as of September 2024, IBM stock is the portfolio's largest holding. The dividend yield for this ETF is low, considering it's less than 2%. But the ETF has outperformed IBM stock over the last five years, even when accounting for reinvested dividends.
For investors more interested in beating the S&P 500 with the AI trend, there's the Global X Artificial Intelligence & Technology ETF (AIQ 1.18%). Previous market-beating performance doesn't guarantee good returns in the future, but this ETF has been beating the market since its inception. IBM stock is one of the portfolio's larger holdings, with a 3.5% position as of September 2024.
Stock splits
Will IBM stock split?
IBM isn't on the list of upcoming stock splits, meaning its management team hasn't announced anything in this regard. As is often the case, investors must use a little deductive reasoning to determine whether IBM will potentially split its stock.
IBM stock has split many times in the past, but not since May 1999. Adjusting for this split, IBM stock was trading at around $220 per share at the time. The 2-for-1 split dropped it closer to $110 per share.
It's hard to draw concrete conclusions from information that's more than 20 years old. However, considering it trades at more than $200 per share today, IBM stock might be getting close to the point where the management team would start considering a stock split.
Related investing topics
The bottom line on IBM
IBM has been in business for more than a century, but it's not the same company it was even five years ago. Management removed parts of the business and acquired other companies, building its vision of enabling hybrid cloud-computing solutions and a hybrid approach to AI.
IBM has a strong history of profitability and rewarding shareholders. But it will need to work hard and spend heavily to ensure it remains competitive.
FAQ
Investing in IBM FAQ
Is IBM publicly traded?
IBM is a publicly traded company and has been since 1962.
Should I hold or sell IBM?
There are several good reasons to sell a stock, including when investors believe better investment opportunities are available. So, deciding between holding and selling IBM stock is a personal decision based on one's own research.
Shareholders who continue to hold IBM stock should periodically review how the company is executing against management's stated vision and consider whether they believe management's vision for the future is truly where things are going.
What exchange is IBM listed on?
IBM stock is listed on the New York Stock Exchange.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool recommends International Business Machines. The Motley Fool has a disclosure policy.
