Jim Cramer salutes the CEO of an old-school tech stock that's making a lot of people money

IBM has achieved a notable turnaround under CEO Arvind Krishna, with its stock delivering a 264% total return since April 2020, significantly outpacing the S&P 500 and Nasdaq. This transformation, driven by Krishna's strategic emphasis on cloud and key acquisitions like Red Hat, has significantly improved investor perception, reflected in a rise from 25% to 48% buy-equivalent analyst ratings and an expanded forward P/E multiple from 10x to 27x. Melius Research recently raised its price target to $350, citing the strength of IBM's infrastructure software business and Red Hat as catalysts for continued multiple expansion and free cash flow-based valuation.

Analysis

International Business Machines Corporation (IBM) has demonstrated a significant strategic and financial turnaround under the leadership of CEO Arvind Krishna, resulting in substantial market outperformance. Since Krishna's appointment in April 2020, IBM's total return has reached 264%, markedly exceeding the S&P 500's 173.5% and the Nasdaq Composite's 191% over the same period. This performance is underpinned by a successful pivot towards cloud computing and strategic acquisitions, most notably the integration of Red Hat. The market's perception has shifted accordingly, reflected in a valuation re-rating where the forward price-to-earnings multiple expanded from approximately 10x in 2019 to 27x. This improved sentiment is further corroborated by analyst actions, with buy-equivalent ratings increasing from 25% to 48% of covering analysts, and a recent price target upgrade by Melius Research to $350. Melius highlights IBM's infrastructure software business as a key catalyst, forecasting potential double-digit growth by year-end, which is seen as crucial for sustaining the stock's higher multiple on a free cash flow basis.

Key Decisions for Investors

• Investors should recognize that IBM's recent stock performance is driven by a fundamental strategic realignment towards cloud and AI, warranting a reassessment of the company beyond its legacy technology profile.
• Given the stock's forward P/E multiple has expanded to 27x, continued outperformance is contingent on executing its growth strategy; therefore, monitor the infrastructure software division's growth rate closely, as this is the key catalyst cited by analysts for further valuation upside.
• With analyst sentiment turning positive and a new price target of $350 from Melius, existing holders might consider maintaining their positions, while those on the sidelines should evaluate if the current momentum and strategic direction align with their growth-oriented portfolio objectives.