by Tom Taulli | April 17, 2014 3:04 pm
IBM (IBM) can’t seem to get back into gear, posting yet another lackluster earnings report.
In Q1, revenues dropped 4% to $22.5 billion, which was below the $22.91 billion consensus estimate. In fact, the performance was the lowest since 2009, when the U.S. economy was mired in the financial crisis. So it should be no surprise that IBM stock is off more than 3% in today’s trading.
As for the bottom line, things were somewhat better. IBM’s adjusted earnings came to $2.54 per share, which was in line with Wall Street expectations. But given the prolonged period of slow revenue growth, IBM stock has also been a laggard. For the past 12 months, IBM stock is down almost 10% — despite a big bull move in the Dow Jones and S&P 500 indices.
Yet might there be an opportunity to buy IBM stock at a good value as the company prepares for a resurgence? To see, let’s take a look at the pros and cons:
Global Platform: IBM has a presence in more than 175 countries. And of course, the company has tremendous technology capabilities, which include four categories:
Secular Changes: There are some megatrends that should help IBM stock for the long term. One is the explosive growth in data. According to IBM, the world is producing an astounding 2.5 billion gigabytes of data every day and much of it is unstructured, such as images, video and social media. To manage this, companies will need advanced systems that IBM offers. To this end, the company has focused its efforts on data analytics, with $24 billion in acquisitions in the space. Another potentially big driver for IBM stock is the cloud. By 2015, the market is expected to hit about $250 billion.
Shareholder Friendly: Even with the tepid revenues, IBM has continues to crank out strong cash flows. And with the money, the company has been focused on shareholder value. For example, in the latest quarter, the company made $8 billion in repurchases of IBM stock. The dividend is also fairly decent, with a dividend yield of 2%.
Growth: This is perhaps the most troubling factor for IBM stock. Revenues have declined for eight consecutive quarters, and Wall Street seems to assume that the company will post a meager performance. Unfortunately, as seen with the latest quarter, IBM often falls below the muted expectations. So what is the plan from IBM’s CEO Virginia M. Rometty? Well, it’s somewhat vague, and not much seems to be working. Rather, Rometty’s only wins have been with moves like unloading divisions or cutting back on costs, which won’t be enough to get IBM stock back to its winning ways.
Hardware: This has turned into another drag on IBM stock. The company has been unloading various assets, such the sale of its low-end server business to Lenovo, but that hasn’t done much to stem the problems. In Q1, hardware revenues plunged by 23% to $2.4 billion, partly due to intense competition. But there are also some other worrisome trends, such as big tech competitors like Facebook (FB), Apple (AAPL) and Google (GOOG) building their own hardware systems.
Emerging Markets: Not long ago, emerging markets were a nice source of growth, but the strength has been fading fast. In the latest quarter, revenues in China dropped by 20% as the country continues to slow down. China’s slowness is also impacting the rest of Asia. But the region is also becoming a source of new competition for hardware and software. Besides, there are also concerns about the NSA scandal. It actually looks like countries like China are pushing back on the purchase of U.S.-based technologies.
Founded in 1911, IBM has shown an enviable ability to adapt. Yet it looks like today’s challenges are pretty steep. For the most part, IBM is chock-full of old-line technologies — and it will be extremely tough to transition to the cloud, mobile and Big Data. Of course, there are a myriad of nimble competitors that do not have to deal with legacy technologies, such as Splunk (SPLK), ServiceNow (NOW) and Workday (WDAY).
Given these obstacles, it is far from clear how IBM will find ways to jump-start its revenue. And the financial moves, like stock buybacks and asset sales, have proven to be ineffectual in boosting IBM stock.
So should you buy IBM stock? No — for now, it looks like there will be little revenue growth for the company.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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