Cramer said IBM shares had a lot going for them, citing the company's giant share buyback, the dividend yield (3.6%), the liquidity of the stock and a possible reduction in the corporate tax rate. He also liked that IBM is increasingly seen as a cloud and artificial intelligence (AI) player.
Despite these positives, so many analysts are on the sidelines. There are four with sell recommendations. Cramer thought IBM could potentially catch a few surprise upgrades to drive the shares higher. And of course, having the blessing of Warren Buffett doesn't hurt either.
Last July I was bullish on IBM. I thought the company could find new avenues of growth before the bottom fell out of its middleware business. Although the stock was already up, I thought investors were ignoring the low valuation. Year to date, shares of IBM are up 22%.
In terms of revenue growth, 2015 was likely the bottom for IBM. Revenue declined 5% in 2013, 7% in 2014 and 12% in 2015. For 2016, analysts expect revenue will be down just 1.6% to $80.5 billion. Next year, the consensus is looking for revenue to grow 0.2%.
After years of layoffs, restructurings and asset sales, it appears the worst is over and fundamentals should gradually improve going forward.
IBM has many opportunities to grow, including cloud, analytics and artificial intelligence.
Big Blue is using its artificial intelligence division (Watson) to collect and process sensor data from billions of devices to allow humans to make better decisions. For example, IBM has 6,000 client engagements in 170 countries feeding data into its Internet of Things (IoT) Watson Artificial Intelligence platform.
Right now, there are an estimated nine billion devices connected to the Internet. IBM estimates there will be 212 billion sensors connected by 2020, including 1.6 billion connected livestock and 1.2 million connected homes.
Whirlpool (WHR) is using Watson to make smart appliances. Panasonic (PCRFY) is focusing on home safety and security. Medtronic (MDT) is using Watson for predictive diabetes patient care and management. Home Depot (HD) is using Watson to find the lowest cost shipping routes by combining live traffic and weather data. Cities are using the IoT data to predict the most cost-effective highway repairs.
IBM Watson Health and the Broad Institute of MIT and Harvard have announced a five-year, $50 million project to use Watson to study thousands of drug-resistant tumors and draw on Watson's computational and machine learning methods to help researchers understand how cancer tumors become drug resistant to treatment.
Insurance companies are leveraging Watson's Weather Channel data and pairing it with automobile sensors to collect driver behavior data to customize insurance plans. The insurance industry is looking to reduce costly accident losses.
IBM plans to release its fourth-quarter results on Jan. 19. Analysts are forecasting revenue of $22.3 billion and earnings of $4.96 per share. Year over year that translates to revenue growth of 1% and EPS growth of 2%.
Obviously, 2017 expected revenue growth of about 0.2% and earnings growth almost entirely made up of share buybacks is not a real fundamental turnaround, but according to Forrester Research, IBM is the undisputed leader in IoT-related artificial intelligence.
Just like cloud computing drove Amazon's (AMZN) shares higher, I think AI will do the same for IBM.