International Business Machines (IBM) $301

An excellent GARP (Growth At A Reasonable Price), worth buying with considerably less risk and downside.

IBM, the steady Eddie, older legacy tech survivor did well gaining 36% in the past year, and 144% in the past 5. That is commendable and well deserved rewarding a transformation, which saw it shedding most of its legacy hardware businesses to focus on the SaaS/Consulting/Red Hat businesses, by leveraging its massive client base. 2020 was the last year of declining sales to $54Bn, from where it has rebounded quite well to an estimated $67Bn in sales in 2025.

It has a pending deal to acquire Confluent (CFLT), tacking on a small but critical streaming business, which it can grow and sustain mid-teens growth for the next decade and expand Free Cash Flow margins into the 20 – 30% range. The biggest synergy is leveraging IBM's distribution network with Confluent's Cloud product. Confluent Cloud is an Apache Kafka-based managed service used to stream, process, and connect real-time data between applications and systems at scale. Confluent's co-founders founded the open source Apache Kafka and built an enterprise level Kafka managed service to run streaming clusters, essentially implementing, scaling and upgrading at a much lower TCO for larger users than the free version, leaving the development teams to focus on building apps. Confluent always had symbiotic relation with cloud service providers, and I'm not surprised that IBM saw them as a strategic fit.

Here’s the synergy: IBM Consulting sells large modernization programs. If IBM is able to make Confluent the default streaming layer, the company can upsell subscriptions to customers who care about real-time data, which in an AI dominant landscape is critical. IBM can grow Confluent faster; The top-line growth rates 16-17%, that the Street is projecting for Confluent could increase considerably due to these synergies.

IBM has done this before. Further cementing the synergy thesis, IBM has done an excellent job with Red Hat, which it acquired in 2019 - that was an extremely intelligent play, and the yields have been terrific. While directly Red Hat is about 12% of IBM’s revenue it does a lot more. The 1-to-3 Multiplier: IBM often tells investors that for every $1 of Red Hat software sold, IBM Consulting earns an additional $3 to $5 in services revenue. If you include the consulting work triggered by Red Hat, the "Red Hat Ecosystem" likely influences 30% to 40% of IBM’s total business. This shows up in its Hybrid Cloud Revenue segment, which includes Red Hat, cloud infrastructure, and specific services. This combined bucket is often >$25 billion annually, which is roughly 38% of total revenue

Buy the GARP: IBM sells for 24x earnings growing at 10%, that’s a PEG of 2.4, a little expensive but it generates far more operating cash at 19% of sales and has good operating margins of 17.5%.

I think it’s worth buying for a 10-12% return, the downside risk is low, and there’s a small dividend yield of 2.3% as well.