Why IBM is one of few tech giants that are actually gaining through the selloff

In the broader sector, shares of tech heavyweights Apple Inc.
AAPL,
-3.83%
have slumped 24.78% while Microsoft Corp.
MSFT,
-4.24%
is down 27.21% over the same period. Meta Platforms Inc. shares
META,
-6.44%
have plunged 50.30% in 2022.

For a spell on Monday IBM and Aspen Technology Inc.
AZPN,
-2.16%
were the only two gainers among the 204 equity components in the SPDR S&P Software and Services ETF
XSW,
-6.03%.

Despite its long history of providing technology hardware to corporate offices and data centers, other parts of IBM are helping the company outperform the sector. Strong performance in its software and consulting businesses, for example, fueled IBM’s better-than-expected first-quarter results. Investors also responded positively to news that news that IBM’s 2022 revenue growth will be at the high end of its prior forecast.

See also: IBM stock rises following Street beat, optimistic outlook despite lost Russia business

BofA Securities, which has a buy rating on IBM, said that Big Blue’s consulting revenue growth is outgrowing the market in a note to clients Monday. The firm’s software growth is also being driven by mid to high-teens growth from its Red Hat business, it said. IBM acquired Red Hat for $34 billion in 2019 in an effort to ramp up its cloud offerings.

BofA noted that IBM Chief Financial Officer Jim Kavanaugh expects the company “to show greater resilience versus other tech hardware companies in uncertain macro conditions,” citing its operations in 170 countries and 17 different industries.

This means that a diversified IBM is operating in countries with different economic curves and a broad range of markets that would perform differently even in a recession, according to Bank of America. Crucially, 50% of IBM’s revenues are recurring, with 80% of its software a high value, annuitized revenue stream, BofA added.

Earlier this year IBM was cited by Morgan Stanley as a “defensive play” in an uncertain macro environment. Only 20% of IBM’s revenue is directly tied to hardware and related operating system revenue, said Morgan Stanley analyst Erik Woodring, in a note to clients. However, more than half of the company’s revenue comes from “more defensive recurring revenue streams,” he said.

See also: IBM upgraded as Morgan Stanley sees stock as a ‘defensive play’ amid macro uncertainties

Of 20 analysts surveyed by FactSet research, seven have a buy rating on IBM and 11 have a hold rating.