IBM stock analysis: would Peter Lynch buy the Big Blue?

International Business Machines (NYSE: IBM) stock price was little changed on Monday after media reports noted that it was shutting down its R&D division in China, affecting over 1,000 jobs. Some of those jobs will move to Bangalore, India, where the country has a huge operation.

IBM share price has risen by about 20% this year and by 58% in the last five years, underperforming some of its top competitors like Microsoft, Amazon, and Alphabet that have benefited from the AI hype. 

IBM turnaround is going on slowly

IBM has been working to turn around its business in the past few years as the once mighty giant faces substantial competition from the likes of Microsoft and Amazon. 

To achieve that, the company’s biggest approach was to split its consulting business into a separate publicly traded company known as Kyndryl, which is now valued at over $5 billion as the stock jumped from $8.8 in 2022 to almost $25. 

IBM has also worked to lower its costs. In 2023, the company announced that it would lay off over 3,900 workers or 1.5% of its workforce. This trend continued this week after Bloomberg reported that it was shutting down its Chinese R&D operations.

These job cuts have helped IBM to boost its margins, with the operating margin rising from 2.9% in 2022 to 12.1% in 2023. 

However, what this turnaround strategy has not done is to dramatically grow IBM’s sales. In 2023, its revenue rose by 2.2% to $61.85 billion. In the same year, Microsoft’s growth rose by over 16% while Google grew by about 9% and Oracle grew by 7%.

The same slow growth momentum continued in the second quarter of this year. IBM’s revenue rose by just 2% to $15.8 billion while its gross profit margin expanded to 56.8%.

Its software business brought in $6.7 billion in revenue, up by 7.1% from the same period in 2023 while consulting fell by 0.9% to $5.2 billion. Its infrastructure revenue rose by 0.7% to 3.6%. These growth metrics mean that the company is not seeing any meaningful growth.

Looking beneath the surface shows that its core areas of focus are not doing well. Data and AI revenues fell by 3% while hybrid infrastructure rose by 4%. Only automation saw double-digit revenue growth.

IBM lacks market share in key industries

A key issue with IBM is that it does not have a big market share in the most important industries. For example, while the company has been investing in its Watson product for over a decade, it has not gained any meaningful share in the industry. 

In other words, IBM is not the company you think about when it comes to AI. Instead, most people think of firms like Nvidia, Microsoft, and Google. 

That’s likely because IBM’s AI solutions are not targeted to the mass market. Instead, its watsonx suite of AI assistants is aimed at enterprise customers. It also offers IBM Consulting and hybrid cloud offerings, helped by Red Hat. 

Talking of the cloud, IBM has not made major strides to gain market share in the industry. Microsoft’s AWS has a 31% market share followed by Azure, Google Cloud, Alibaba Cloud, and Salesforce. IBM comes a distance sixth in the industry with just a 2% market share.

Would Peter Lynch invest in IBM?

One of the top strategies for selecting companies is using the Growth at a Reasonable Price (GARP) approach by Peter Lynch, the legendary stock investor. 

First, he looks at a company with a trailing price-to-earnings ratio of less than 15. IBM has a GAAP P/E multiple of 21 and a non-GAAP figure of 19.1, meaning that it fits the first criteria.

Second, the forward P/E multiple should be less than 15. In this case, IBM has a GAAP and non-GAAP multiples of 21 and 19, meaning that he would not invest in it.

Third, the debt to equity should be less than 35% while IBM has a metric of 2.2, making it a good buy using this metric. Additionally, the PEG ratio should be less than 12, of which IBM has 3.89. 

Therefore, the main disqualification factor is that IBM’s forward PE ratio is higher than his preferred figure. I believe that a forward P/E multiple of 21.6 for IBM is quite expensive. 

IBM stock price analysis

Turning to the weekly chart, we see that the IBM share price has jumped to an important resistance level at $195, its highest swing on March 4th. This is a notable price since it has now formed a double-top chart pattern, which often results into a bearish breakout.

Therefore, while the stock remains above the 50-week and 100-week moving averages, the double-top pattern means that it could resume the bearish trend. This pattern will become invalid if the stock jumps above the key resistance point at $200.