Want to Hide Out in Tech? Buy IBM Stock, Morgan Stanley Says.

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One of the best-performing tech stocks in 2022 has been

IBM
,
as the company continues to show progress on a multi-year turnaround. There are reasons to believe the outperformance will continue—likely with support from the company’s quarterly results coming on July 18.

CEO Arvind Krishna has adjusted the company’s strategy to focus on hybrid clouds and artificial intelligence, among other steps, including spinning off

Kyndryl
,
the low-margin managed services business last year. 

Back in April, IBM (ticker: IBM) said full-year revenue on a constant-currency basis will be at the high end of its previous full-year 2022 growth target of mid-single-digit percentage growth, which the Street translates as 6%. That would be about even with the first quarter, once factors related to the ongoing relationship with Kyndryl are backed out.

In a research note Thursday previewing IBM’s financial results, Morgan Stanley analyst Erik Woodring said he expects revenue for the quarter will be in line with the 6% full-year projection on a constant currency basis. Channel checks on the company’s software and consulting business remain “solid,” he writes, and adds that results will benefit from the first month of sales for the company’s newly launched z16 mainframe line.

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Woodring reiterated his Overweight rating and $157 target price on the shares, adding that IBM remains one of his favorite stocks. He sees IBM as a defensive pick, with less risk of downward estimate revisions than other enterprise plays. That’s because more than 50% of revenue is recurring, and the company has exposure to “secularly growing areas of IT,” he says. The recent relative outperformance of IBM shares will continue in the second half of the year; the stock has climbed 5% this year, compared with an 18% drop for the

S&P 500
.

The analyst says he’ll be listening on the quarterly earnings call for any macro-related changes in the company’s sales cycle, adjustments in the gross margin outlook (he’s a little worried about higher labor costs), the status of the company’s M&A deal pipeline, and the early read on z16 sales.

Among other attributes, IBM shares offer a rich 4.8% yield, about in line with the telco giants

AT&T

(T) and

Verizon

(VZ), and above the payout offered by every other major tech company. Meanwhile, the stock trades at a relatively modest valuation—about two times expected 2022 sales and roughly 14 times expected current-year per-share earnings.

IBM shares traded 2% higher to $140.92 on Thursday afternoon.

Write to Eric J. Savitz at [email protected]