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Microsoft and IBM: Add These (Reinvented) Old-School Tech Stocks to Your List

Microsoft and IBM are veteran tech names that have reinvented themselves. Investors would do well to give them a look.

They say that you can’t teach an old dog new tricks. But old-school tech providers Microsoft  (MSFT) - Get Microsoft Corporation (MSFT) Report and IBM  (IBM) - Get International Business Machines (IBM) Report have been taking massive action to remain relevant in a transforming business world.

Heavy investments in areas like cloud computing have given these iconic companies new life, and investors should take notice.

During the recent market selloff these stocks showed significant relative strength, which tells us that buyers are reluctant to part with their shares.

All this supports adding these old-school tech stocks to your shopping list. Here's a deeper look at some of the changes these companies are making and why they deserve a place in your portfolio.

How the Long Tech Rally Evolved

Microsoft 

Since taking the reins seven years ago, Satya Nadella has transformed the Redmond, Wash., company from a legacy software provider into a cloud-computing powerhouse. He steered away from its traditional perpetual software license model to a wider-margin subscription model.

Investments in public cloud computing platform Microsoft Azure, which is now No. 2 in global market share behind Amazon  (AMZN) - Get Amazon.com, Inc. Report Web Services, are paying off in a big way. That's particularly as more companies pursue digital transformation thanks to the pandemic and the rise of remote work.

Azure revenue grew 50% in fiscal 2021 and shows no signs of slowing, and other areas of Microsoft’s cloud-based businesses are enjoying strong momentum.

Gaming, security, and the professional social-media site LinkedIn all have surpassed $10 billion in annual revenue over the past three years, and cloud-based versions of software like Office, Dynamics, and Teams have strong growth prospects.

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The bottom line here is that Microsoft has evolved from a personal-computing innovator to a true tech powerhouse. It's the perfect example of what can happen when a legacy company reinvents itself.

International Business Machines 

Big Blue is another old-school tech company trying to get its mojo back.

After years of declining revenue, the pioneer of computing technology decided it was time for a change.

Chief Executive Arvind Krishna, who took the helm in 2020, decided to spin off the company’s underperforming IT-infrastructure-services unit to focus on areas with more potential, like hybrid cloud computing and artificial intelligence.

Krishna, who played a key role in IBM’s $34 billion purchase of leading enterprise open-source solutions provider Red Hat in 2019, clearly understands the type of products and services that major enterprises demand.

While there will certainly be some growing pains along the way, the latest numbers -- IBM delivered second-quarter revenue of $18.7 billion, up 3% year-over-year, and expects to deliver full-year revenue growth -- could be a sign that the tide is turning.

Jefferies analyst Kyle McNealy just initiated coverage of IBM with a buy rating and $170 price target. That's about 20% upside potential from Thursday's closing price.

In his research note, McNealy said, “We are seeing a strong demand environment driven by pandemic recovery and companies’ focus on digitization and digital resilience. After years of transition, we see a solid path for IBM to exceed growth expectations.”

He might be on to something there. And with a 4.6% dividend yield, IBM is an attractive legacy tech name.