3 Charts That May Scare You Away From IBM, and 1 Big Reason to Buy Big Blue Today
IBM has not been kind to investors since Ginni Rometty took over Sam Palmisano's CEO office. The stock hasn't necessarily lost shareholders a ton of money over the last two years and change, but IBM has lagged far behind the surging Dow Jones Industrial Average .
When Rometty took the helm, IBM had a smoothly humming cash machine. She did not leave Palmisano's creation untouched, however.
IBM remains in the midst of a multiyear strategy shift, which is placing a heavy emphasis on cloud-computing software and services while moving away from the old hardware powerhouse. IBM is selling an important piece of its server hardware empire to Chinese rival Lenovo, leaving a far smaller server business with a focus on power systems and mainframes.
Strategy shifts are never easy, and this is no exception.
Let me show you a few charts that might scare hardened investors away from buying IBM shares today.
First, the missing hardware revenue is making a difference, both in direct sales and in cash generation:
Second, IBM stock gets a ton of direct attention from the company's board of directors, which has spent $92 billion on share buybacks over the last 10 years. This strategy has kept price-to-earnings ratios low and sinking, but cash-based valuation metrics don't look so rosy:
Finally, not even the analyst crowd is convinced that IBM is headed in the right direction. The PEG ratio is a measure of valuation with a big side of Wall Street analysis, since it incorporates analysts' estimates of forward growth.
Here, anything below a 1 value might point to an undervalued stock, while 2 and above are often seen as red flags -- warning signs of disappointing growth.
IBM's recent PEG scores are downright terrifying, whether you compare those growth estimates to reported results or give IBM the benefit of next-year earnings estimates:
Have a seat. Grab a cool drink. Wipe the sweat off your brow. We're done with the scary charts now.
The next one will be much more soothing. Here's what Ginni Rometty's remixed product strategy is doing to IBM's profit margins:
So how will we determine whether Rometty is a big winner or an abject failure?
The trick is to restore that flagging revenue growth without sacrificing IBM's fantastic margins. Rometty must complete this transition without jangling the nerves of customers and shareholders too much. That's why she's moving slowly, taking one small step at a time rather than trying to complete the whole shift in a single year.
There are always unexpected roadblocks on the way. For example, IBM misjudged the impact of new Chinese government attitudes to foreign products last year, and it couldn't have predicted the chilling effect on international trade of Edward Snowden's disclosures on U.S. National Security Agency activities. These events have added some weight to IBM's burden in 2013 and 2014.
But Big Blue has the resources to overcome these short-term challenges, and I believe that Rometty's new strategy is a good choice for the long run. This stock might still fall further as IBM's business blueprint gets redrawn, but market timing is the bad kind of fool's errand. I would be shocked if these shares aren't back to beating the Dow five years from now.
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The article 3 Charts That May Scare You Away From IBM, and 1 Big Reason to Buy Big Blue Today originally appeared on Fool.com.Anders Bylund has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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