Here’s Why IBM is a Smart Portfolio Pick in Volatile Market – December 29, 2022

Shares of International Business Machines Corporation (IBM Free Report) have risen 17.9% over the past three months, driven by healthy revenues on the back of a flexible business model and a quick time-to-market schedule to meet clients’ evolving needs. Earnings estimates for the current fiscal have remained steady over the past three months. With healthy fundamentals, this Zacks Rank #2 (Buy) integrated systems provider appears to be a solid investment option at the moment. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Growth Drivers

Armonk, NY-based IBM has evolved as a leading provider of cloud and data platforms. The company provides advanced information technology solutions, computer systems, quantum computing and supercomputing solutions, enterprise software, storage systems and microelectronics. Its hybrid cloud platform and AI technology facilitate the digital transformation of clients and modernize applications to increase agility, drive innovation and create operational efficiencies.

IBM is poised to benefit from strong demand for hybrid cloud and AI, driving growth in the Software and Consulting segments. Its growth is expected to be driven primarily by analytics, cloud computing and security in the long haul. The company has expanded its partner relationships in AI, network automation and security to help the telecommunications industry evolve as 5G and Edge Computing take center stage. It has extended the secured cloud services for business enterprises while improving their performance through reduced latency and higher data security features.

A combination of a better business mix, improving operating leverage through productivity gains and increased investment in growth opportunities will likely drive profitability. IBM’s research and development (R&D) initiatives set it apart from its peers. On an annual basis, the company invests around 7-8% in R&D to reap the high-growth and high-value opportunities.

In addition, the acquisition of Red Hat has bolstered the Open Hybrid architecture initiative of the company. The deal marks IBM’s largest acquisition ever and the combined company is likely to alter the dynamics of “the cloud market for business.” Specifically, IBM hopes to leverage Red Hat to help it become the world’s largest hybrid cloud platform provider.

More than 4,000 clients are utilizing Red Hat and IBM’s hybrid cloud platform. We remain bullish regarding improving the utility of hybrid cloud services based on the architecture built by IBM and Red Hat, by notable clients, including American Express, Bharti Airtel, Vodafone, Banco Sabadell, Broadridge Financial Solutions and Caixa Bank. Red Hat’s expanding foothold across the Asia Pacific is also anticipated to bolster IBM’s TAM (total addressable market).

IBM has spun off its legacy Managed Infrastructure Services business in a bid to accelerate its hybrid cloud growth strategy, with a focus on enabling clients with accelerated digital transformation. It has further restructured its segments post the separation of its managed infrastructure services business from Kyndryl.

The company delivered an earnings surprise of 1.5%, on average, in the trailing four quarters and has a long-term earnings growth expectation of 6.6%.

Other Key Picks

Ooma Inc. (OOMA Free Report) , sporting a Zacks Rank #1, delivered an earnings surprise of 21.7%, on average, in the trailing four quarters. Earnings estimates for Ooma for the current year have moved up 37.8% since March 2022. It has a VGM Score of B.

Ooma offers communications services and related technologies for businesses and consumers in the United States and Canada. It helps to create powerful connected experiences for businesses and consumers through its smart cloud-based SaaS platform.

Harmonic Inc. (HLIT Free Report) , carrying a Zacks Rank #2, delivered an earnings surprise of 55.5%, on average, in the trailing four quarters. Earnings estimates for Harmonic for the current year have moved up 48.6% since March 2021.

Harmonic provides video delivery software, products, system solutions and services worldwide. With more than three decades of experience, it has revolutionized cable access networking via the industry’s first virtualized cable access solution, enabling cable operators to more flexibly deploy gigabit Internet service to consumers’ homes and mobile devices.

AudioCodes Ltd. (AUDC Free Report) , sporting a Zacks Rank #1, is likely to benefit from the secular tailwinds related to IP-based communications. Incorporated in 1992 and headquartered in Lod, Israel, it offers advanced communications software, products and productivity solutions for the digital workplace. It has a long-term earnings growth expectation of 9%.

AudioCodes aims to leverage its long-term partnership with Microsoft to further strengthen its market position. It is also likely to benefit from its continued focus on high-margin businesses.