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Ten years ago, shares of International Business Machines (IBM) traded for $123.13. As I write these words, the stock trades for $123.01, the very definition of dead money.

The company's once formidable moat narrowed as the firm's legacy businesses declined. Consequently, this titanic tech firm trades for a pedestrian P/E multiple below 14 while other tech names lead the market.

But as is often noted by investing pundits, past performance does not predict future returns. While that oft reiterated line warns investors that high flying stocks can spiral to the ground, businesses that muddle along for extended periods can also change course for the better.

My 2014 article on Microsoft (MSFT) is testimony to an unloved company that outperformed the market by a 6 to 1 margin since that piece debuted.

While I'm unconvinced IBM will return to its former glory, I see developments that offer real hope. If the initiatives bear fruit, investors may reap rich rewards.

IBM is characterized as a "no growth" stock. If only that were true. The fact is the company's revenues dropped throughout the last decade. Peruse the chart below to view a business in decline.

Source: Metrics Macrotrends/ Chart by Author

Despite the loss of revenue, IBM still generates fairly robust FCF. Consequently, management mitigates share value losses through stock buybacks.

Source: Metrics Macrotrends/ Chart by Author

This year, IBM's revenue fell to $35.7 billion, dropping by 4%. Much of the decline is attributed to currency impacts and divested businesses. Additionally, the COVID-19 crisis reduced revenues from the global technology hardware and financial segments.

Meanwhile, the company's cloud and cognitive software business fared well. IBM's hybrid cloud revenues grew 34% in the second quarter after a 23% increase in Q1.

IBM once dominated the server market. While that heyday passed, the company's server offerings still rank among the top five in the industry. In Q4 of 2019, IBM was the 3rd largest server vendor with 8.3% of the global market.

IBM experienced a 17.6% growth in server revenues during that quarter while the two leaders, Hewlett Packard (HPE) and Dell Technologies (DELL) reported -3.4% and -9.9% revenue growth, respectively

Last August, the company unveiled its newest POWER processor. Using a 7nm manufacturing process, the POWER10 is designed to support 3X the number of users and workloads as the processor it replaces. Perhaps of greater importance is that the chip is designed to enhance IBM's Red Hat OpenShift platform.

The POWER10 chip will also improve AI inference performance ten to twenty-fold and provides enhanced security.

Source: Forbes

I don't view this as game changing news. Rather, I am providing an example of IBM's ability to compete against rivals in one of the company's legacy businesses.

Despite headwinds related to the pandemic, IBM notched double-digit YoY cloud revenue growth for four consecutive quarters.

Source: IBM/Chart by Author

Source: IBM/Chart by Author

While IBM's cloud growth does not match that of the company's three largest rivals, its growth is accelerating while that of AWS, Azure and Google Cloud is slowing.

Source: Venture Beat

Despite getting in the game late, IBM's cloud revenues (Q2 revenue $6.3 billion) are substantial when compared to its top rivals, Amazon's (AMZN) AWS (Q2 revenue $10.8 billion), Microsoft's (MSFT) Intelligent Cloud (Q4 revenue $13.4 billion) and Alphabet's (NASDAQ:GOOG)(NASDAQ:GOOGL) Google Cloud (Q2 revenue $3 billion).

IBM need not be the number one cloud provider to experience strong revenue growth. The global cloud market is projected to experience a CAGR of 17.5% over the next half decade, growing from roughly $370 billion today to $832 billion in 2025.

Source: MARKETSANDMARKETS

I posit IBM's client relationships often provide the company with an inside track in the competition for cloud customers. For example, Morningstar claims IBM holds 90% of the global mainframe market. In the US alone, the company has over 13,000 mainframe customers, and 47 of the Fortune 50 companies are IBM clients.

Last July, IBM announced a cloud initiative described as, "the world's first financial services-ready public cloud." In collaboration with Bank of America (BAC), the platform is designed to "address specific requirements of financial services institutions for regulatory compliance, security and resiliency."

This technology offers a speed and efficiency that's profound But this technology, like any technology for banks, is truly only accessible if it meets all the regulatory requirements for safety and soundness and other compliance obligations that banks have.

Eugene Ludwig, CEO Promontory Financial Group

BAC's work with IBM underlines the company's ability to leverage business relationships to woo cloud clients. IBM mainframes are the backbone of the globe's financial institutions, processing 87% of all credit card applications and 29 billion ATM transactions annually. The top ten financial institutions are customers of the firm.

Not only does IBM have an advantage due to its hardware being utilized by these companies, Big Blue also has an insider's understanding of the needs of financial firms. Consider this:

Accenture estimates financial services will lose $700 billion due to cyber-crime over a five year period.

...the financial services industry continually has the highest cost of cybercrime.

Chris Thompson, Accenture Security

From 2009 to 2017, $321 billion in fines were paid due to banks failing to meet financial regulations.

Once again, I use a recent development to illustrate the company's ability to compete against top rivals.

The chart below illustrates the magnitude of IBM's client relationships.

Source: Forbes

Before I outline the positives of quantum computing, let me advise readers of the obstacles in the way of this tantalizing development.

There are those that view quantum computing as an exercise in futility. Decoherence, a term used to describe error producing flaws created by vibrations, temperature fluctuations, electromagnetic waves and properties inherent in current quantum computers, could stand in the way of worthwhile results.

Furthermore, quantum computers are cooled to near absolute zero. This, and other design aspects, results in equipment much larger than mainframe models. Consequently, quantum computers will not be marketed to the average consumer.

Nonetheless, and despite formidable obstacles inherent in the development of these devices, recent events indicate quantum computing could be used by mainstream businesses in the foreseeable future. Furthermore, IBM is one of a handful of companies competing for the lead in this arena.

Early last year, IBM introduced the Q System One, the world's first quantum computer designed for scientific and commercial use. The company operated a forerunner of the Q System One since May of 2016. More than 100,000 users completed 6.47 million experiments resulting in the publication of 130 research papers on that equipment.

To appreciate the superiority of quantum computing, look no further than a recent exercise conducted by Google. That company's Sycamore quantum processor recently completed a problem in 200 seconds that would require a supercomputer 10,000 years to solve.

A day will likely come when companies without access to quantum computers will be incapable of competing in their fields. A prime example is the formulation of drugs.

The first step in designing a compound used to alter a disease pathway is to determine the electronic structure of the associated molecule. Penicillin contains 41 atoms and requires conventional computers to utilize 10 to the 86 bits to conduct the required research. That is a number that would require more transistors than the sum of all of the atoms in the universe. However, it is projected that a quantum computer will one day be capable of this level of computation.

For investors longing to take advantage of the opportunities inherent in this technology, be aware that the financial rewards associated with quantum computing are still over the horizon, albeit not so far away as to be beyond our reach.

Estimates have the industry generating $2 billion to $5 billion in revenues by 2024; however, as the technology improves, a virtual explosion in its use will materialize. Projections are for a CAGR of 56% from now to 2030 with the quantum computer market share reaching roughly $65 billion by that date.

I will readily admit I have not been a fan of IBM's former management teams. I also note I've read a great deal of commentary on SA by employees and customers of the company, past and present, indicating the firm is gripped by a systemic malaise. I will add that those with a bit of life experience can appreciate that a system wide ingrained business culture can be difficult to uproot.

There is some evidence that Arvind Krishna, the new CEO, is responsible for the positive steps IBM has taken in the cloud over the last few years. I would opine it is too soon to make a judgment on his ability to turn IBM into a leader in the tech industry.

However, hope springs eternal, and Krishna's leadership (or lack thereof) will be the determining factor moving forward.

IBM's current yield hovers around 5.1%. The payout ratio is a bit below 60% and the company has a five year dividend growth rate of 8.63%.

Moody's debt rates IBM as A2, roughly in the middle of investment grade credit ratings.

As I type these words, the shares trade for $123.86. The 12 month price target of 16 analysts is $139.07. The price target of the 6 analysts rating the company after the Q2 report is $142.66.

I do not claim that IBM stock is on the cusp of a monumental shift. Rather, I view developments as intriguing and worthy of perusal. The change in leadership, the company's efforts in the cloud, and the firm's position among the leaders of quantum computing lead me to believe IBM could regain a position as a tech leader. If so, there are big gains to be made in Big Blue.

Nonetheless, there is no clarity in these areas. Consequently, I rate IBM a HOLD.

Early this year, IBM's list of quantum computing clients passed 100, a surge from 40 the year before. The company predicts that 20% of business and government organizations will budget for quantum computing by 2023, an increase from less than 1% in 2018.

When considering this and the recent double-digit gains in the company's cloud offerings, I would not quibble with the idea that IBM presents as a Speculative Buy. With that in mind, I initiated a very small position in the company (about of 1% of my portfolio).

The company notched $1.4 billion in FCF in Q1 and $2.3 billion in Q2, so even if the hoped-for initiatives fail to gain momentum, I believe IBM will manage to muddle along, providing a safe dividend for the short to mid term.

I hope to continue providing articles to SA readers. If you found this piece of value, I would greatly appreciate your following me (above near the title) and/or pressing "Like this article" just below. This will aid me to continue to write for SA. Best of luck in your investing endeavors.

Disclosure: I am/we are long IBM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have no formal training in investing. All articles are my personal perspective on a given prospective investment and should not be considered as investment advice. Due diligence should be exercised and readers should engage in additional research and analysis before making their own investment decision. All relevant risks are not covered in this article. Readers should consider their own unique investment profile and consider seeking advice from an investment professional before making an investment decision.

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