IBM CEO Arvind Krishna speaks at an IBM facility in Poughkeepsie, New York, on Oct. 6, 2022. IBM announced $20 billion in investments during President Biden’s visit that will go toward research and development and the manufacturing of semiconductors, mainframe technology, artificial intelligence and quantum computing in the Hudson Valley.
Dana Ullman | Bloomberg | Getty Images
IBM isn’t often described as a hot company. But in a year that saw investors abandon all major tech stocks, Big Blue was in the green.
The Nasdaq is closing out its worst year since 2008. High gas prices, soaring inflation and the Federal Reserve’s steady pace of rate increases have punished growth stocks and favored more mature, less volatile names that are viewed as more recession-resistant.
Tech names that thrived during the Covid days suffered the most as the economy reopened and consumers returned to many of their old habits.
Among U.S. tech companies valued at $50 billion or more, IBM was one of only two to generate positive returns in 2022. As of Friday’s close, the stock was up 6% for the year. The other gainer is VMware, which is up 5% because it agreed in May to be acquired by Broadcom for $61 billion.
While Meta, Amazon and Tesla have been pummeled, investors turned to 111-year-old IBM, betting on its stable earnings, alongside energy stocks such as Exxon Mobil, health-care names including Merck and industrials Northrop Grumman and Lockheed Martin.
IBM beats Big Tech in 2022
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IBM is “trading well above its historical range,” Bernstein Research analysts wrote in a Dec. 20 note to clients. The firm has a hold rating on the stock.
Nobody will mistake IBM for a growth stock. Expansion is consistently in the single digits, and last year the company spun off Kyndryl, its managed infrastructure services business, into a separate publicly traded entity. That cut head count by about 90,000.
But IBM generated $752 million in free cash flow in the latest quarter, up 25% from a year earlier, and paid out $1.5 billion in dividends. Third-quarter earnings and revenue both topped estimates, and the company raised its forecast for the full year.
Crawford Investment Counsel in Atlanta, which focuses on income and dividends, looked at IBM in 2016 and concluded that it would be too early for a major investment, said Aaron Foresman, an equity analyst at the firm.
‘Much closer to their vision’
Crawford’s thesis changed in 2019, after IBM bought faster-growing Red Hat for $34 billion. The firm, which today has $6.7 billion under management, boosted its IBM stake from $2 million to $30 million and kept buying until its holdings reached $109 million.
IBM took a hybrid approach to the cloud under CEO Arvind Krishna, who succeeded Ginni Rometty at the helm in 2020. After struggling to gain scale as a cloud infrastructure provider, the company bet that enterprises would use on-premises data center infrastructure as well as the public cloud, rather than relying entirely on one approach or the other.
“Three years later, it’s much closer to their vision than everything on public cloud,” Foresman said. His firm sold 3% of its shares in the second and third quarter of this year.
Consulting remains a huge part of IBM’s business, accounting for one-third of revenue. In that realm, IBM partners with the big cloud providers, rather than strictly competing with them. The company has a backlog of business with Microsoft worth more than $1 billion, and an even bigger one with Amazon, Krishna said in a conversation with RBC CEO Dave McKay in November.
IBM also made technological advances in 2022, introducing the z16 mainframe computer. When a new mainframe hits, many clients upgrade. That leads to greater hardware revenue and highly profitable transaction processing software to run on the machines. IBM’s prior mainframe boom cycle started in September 2019.
While IBM stayed away from any splashy high-priced acquisitions this year, it announced some smaller deals to enhance certain capabilities. Earlier this month, IBM agreed to buy Octo, a consulting company based in Virginia that targets government agencies. Terms weren’t disclosed. It also absorbed consulting companies Dialexa and Sentaca this year.
Foresman described the purchases as an appropriate use of capital and “so small that they’re not necessarily disclosing transaction multiples.”
Still, Krishna recognizes that the economic backdrop isn’t ideal. He said in October that higher prices have led to “some caution creeping into the conversations” in Europe, where the company has to prepare for a downturn. In the Americas, where IBM gets about 53% of revenue, the business climate is “very robust,” he said.
The Bernstein analysts said the stock’s direction from here might simply ride on the state of the economy, rather than any major catalyst inside the company.
“Given its defensive characteristics and historical performance, we believe that IBM is likely to fare well if we continue to have pressured markets, and likely to lag major indices if we enter a recovery period,” they wrote.
IBM’s model through 2024 calls for mid-single-digit revenue growth, translating into free cash flow growth in the high single digits.
That’s good enough for investors who look for safety in their equity bets.
“Combined with mid-single-digit revenue growth, a couple points better than that on EPS and a 5% dividend yield is — you know, that’s not a home run, but it’s well within our expectations for what we’re trying to accomplish,” Foresman said.
CEO of Nvidia, Jensen Huang, speaks during the launch of the supercomputer Gefion, where the new AI supercomputer has been established in collaboration with EIFO and NVIDIA at Vilhelm Lauritzen Terminal in Kastrup, Denmark October 23, 2024.
Ritzau Scanpix | Mads Claus Rasmussen | Via Reuters
Nvidia is replacing rival chipmaker Intel in the Dow Jones Industrial Average, a shakeup to the blue-chip index that reflects the boom in artificial intelligence and a major shift in the semiconductor industry.
Intel shares were down 1% in extended trading on Friday. Nvidia shares rose 1%.
Nvidia shares have climbed over 170% so far in 2024 after jumping roughly 240% last year, as investors have rushed to get a piece of the AI chipmaker. Nvidia’s market cap has swelled to $3.3 trillion, second only to Apple among publicly traded companies.
Companies including Microsoft,Meta, Google and Amazon are purchasing Nvidia’s graphics processing units (GPUs), such as the H100, in massive quantities to build clusters of computers for their AI work. Nvidia’s revenue has more than doubled in each of the past five quarters, and has at least tripled in three of them. The company has sginaled that demand for its next-generation AI GPU called Blackwell is “insane.”
With the addition of Nvidia, four of the six trillion-dollar tech companies are now in the index. The two not in the Dow are Alphabet and Meta.
While Nvidia has been soaring, Intel has been slumping. Long the dominant maker of PC chips, Intel has lost market share to Advanced Micro Devices and has made very little headway in AI. Intel shares have fallen by more than half this year as the company struggles with manufacturing challenges and new competition for its central processors.
Intel said in a filing this week that the board’s audit and finance committee approved cost and capital reduction activities, including lowering head count by 16,500 employees and reducing its real estate footprint. The job cuts were originally announced in August.
The Dow contains 30 components and is weighted by the share price of the individual stocks instead of total market value. Nvidia put itself in better position to join the index in May, when the company announced a 10-for-1 stock split. While doing nothing to its market cap, the move slashed the price of each share by 90%, allowing the company to become a part of the Dow without having too heavy a weighting.
The switch is the first change to the index since February, when Amazon replaced Walgreens Boots Alliance. Over the years, the Dow has been playing catchup in gaining exposure to the largest technology companies. The stocks in the index are chosen by a committee from S&P Dow Jones Indices.
Charles Liang, chief executive officer of Super Micro Computer Inc., during the Computex conference in Taipei, Taiwan, on Wednesday, June 5, 2024. The trade show runs through June 7.
Annabelle Chih | Bloomberg | Getty Images
Super Micro investors continued to rush the exits on Friday, pushing the stock down another 9% and bringing this week’s selloff to 44%, after the data center company lost its second auditor in less than two years.
The company’s shares fell as low as $26.23, wiping out all of the gains for 2024. Shares had peaked at $118.81 in March, at which point they were up more than fourfold for the year. Earlier that month, S&P Dow Jones added the stock to the S&P 500, and Wall Street was rallying around the company’s growth, driven by sales of servers packed with Nvidia’sartificial intelligence processors.
Super Micro’s spectacular collapse since March has wiped out roughly $55 billion in market cap and left the company at risk of being delisted from the Nasdaq. On Wednesday, as the stock was in the midst of its second-worst day ever, Super Micro said it will provide a “business update” regarding its latest quarter on Tuesday, which is Election Day in the U.S.
The company’s recent challenges date back to August, when Super Micro said it would not file its annual report on time with the SEC. Noted short seller Hindenburg Research then disclosed a short position in the company and wrote in a report that it identified “fresh evidence of accounting manipulation.” The Wall Street Journal later reported that the Department of Justice was in the early stages of a probe into the company.
Super Micro disclosed on Wednesday that Ernst & Young had resigned as its accounting firm just 17 months after taking over from Deloitte & Touche. The auditor said it was “unwilling to be associated with the financial statements prepared by management.”
A Super Micro spokesperson told CNBC that the company “disagrees with E&Y’s decision to resign, and we are working diligently to select new auditors.” Super Micro does not expect matters raised by Ernst & Young to “result in any restatements of its quarterly financial results for the fiscal year ended June 30, 2024, or for prior fiscal years,” the representative said.
Analysts at Argus Research on Thursday downgraded the stock in the intermediate term to a hold, citing the Hindenburg note, reports of the Justice Department investigation and the departure of Super Micro’s accounting firm, which the analysts called a “serious matter.” Argus’ fears go beyond accounting irregularities, with the firm suggesting that the company may be doing business with problematic entities.
“The DoJ’s concerns, in our view, may be mainly about related-party transactions and about SMCI products ending up in the hands of sanctioned Russian companies,” the analysts wrote.
In September, the month after announcing its filing delay, Super Micro said it had received a notification from the Nasdaq indicating that its late status meant the company wasn’t in compliance with the exchange’s listing rules. Super Micro said the Nasdaq’s rules allowed the company 60 days to file its report or submit a plan to regain compliance. Based on that timeframe, the deadline would be mid-November.
Though Super Micro hasn’t filed financials with the SEC since May, the company said in an August earnings presentation that revenue more than doubled for a third straight quarter. Analysts expect that, for the fiscal first quarter ended September, revenue jumped more than 200% to $6.45 billion, according to LSEG. That’s up from $2.1 billion a year earlier and $1.9 billion in the same fiscal quarter of 2023.
Peopl walk outside Steve Jobs Theater at the Apple Park campus before Apple’s “It’s Glowtime” event in Cupertino, California, on Sept. 9, 2024.
Nic Coury | AFP | Getty Images
Apple will buy Pixelmator, the creator of image editing apps for Apple’s iPhone and Mac platforms, Pixelmator announced Friday in a blog post.
Pixelmator, a Lithuanian company, was founded in 2007, and in recent years has been best known for Pixelmator and Pixelmator Pro, which compete with Adobe Photoshop. It also makes Photomator, a photo editing app.
Apple has highlighted Pixelmator apps over the years in its keynote product launches. In 2018, Apple named Pixelmator Pro its Mac App of the year, citing the company’s enthusiastic embrace of Apple’s machine learning and artificial intelligence capabilities, such as removing distracting objects from photos or making automated color adjustments.
“We’ve been inspired by Apple since day one, crafting our products with the same razor-sharp focus on design, ease of use, and performance,” Pixelmator said in its blog post.
Apple does not acquire as many large companies as its Silicon Valley rivals. It prefers to make smaller acquisitions of companies with products or people that it can use to create Apple features. Neither Pixelmator nor Apple provided a price for the transaction.
Pixelmator said in its blog post that there “will be no material changes to the Pixelmator Pro, Pixelmator for iOS, and Photomator apps at this time.”
Earlier this week, Apple released the first version of Apple Intelligence, a suite of features that includes photo editing abilities such as Clean Up, which can remove people or objects from photos using AI.
Apple has acquired other popular apps that received accolades at the company’s product launches and awards ceremonies.
In 2020, Apple bought Dark Sky, a weather app that eventually became integrated into Apple’s default weather app. In 2017, it bought Workflow, an automation and macro app that eventually became Shortcuts, the iPhone’s scripting app, as well as the groundwork for a more capable Siri assistant.