Believe it or not, there were some positives from International Business Machines Corp.‘s (IBM) first quarter earnings report. You wouldn’t know it from IBM stock’s 6% decline post-earnings, but the company had a decent quarter.
The fact that IBM stock is not trading higher in response to earnings and that there is not more emphasis on its positives is a reflection of management’s failure.
In retrospect, IBM still doesn’t get it, and therefore, IBM stock won’t recover.
Where IBM Stock Thrived
During IBM’s first quarter, its strategic imperatives revenue rose 14% to $7 billion. This includes cloud and analytics. Furthermore, the company’s annual revenue run rate for cloud delivered as a service increased 42% to $5.4 billion.
In other areas, IBM’s mobile revenue increased 88%, security grew 18%, and analytics was higher by 7%. These are all impressive measures of growth for IBM, which was likely driven by the company’s leading healthcare analytics platform Watson, SoftLayer and Internet of Things initiatives.
The $10 Billion Question
With IBM stock essentially losing $10 billion in value following its first quarter report, the big question is why did management choose not to highlight and emphasize the performance of these strong areas?
If you look at IBM’s segment performance during the quarter, all of its major reporting areas posted significant year-over-year losses.
| Segment | Year-over-year loss | Revenue (millions) |
| Cognitive Solutions | 1.7% | $4,000 |
| Global Business Services | 4.3% | $4,100 |
| Tech Services & Cloud Platforms | 1.5% | $8,400 |
| Systems (hardware) | 21.8% | $1,700 |
| Global Financing | 11.2% | $410 |
The problem is that IBM has so much junk within its business that it is completely overshadowing the good.
At the end of the day, IBM has no choice but to report the big losses from its junk, but there is a smart way to do so, where investors know the bad is coming, but can also look forward to the future by identifying areas of promise.
Be More Like Microsoft
Since Satya Nadella took over as Microsoft Corporation‘s (MSFT) CEO in early 2014, the stock price has risen more than 50%. Prior to that, MSFT had mostly traded flat since the early 2000s.
Now if we look at MSFT as a whole, it still has all of the same junk that weighed on shares during Steve Balmer’s tenure. In fact, its only real growth over the last few years has come at the hands of an acquired Nokia handset unit and other acquisitions.
However, Nadella has managed to reverse shareholder sentiment by adopting a subscription approach at Microsoft, and by emphasizing new cloud products in all areas of the business. Furthermore, Nadella emphasized the performance of Office 365 subscriber gains in each quarterly report along with the performance of other important cloud programs like Azure.
The point is that MSFT has added $150 billion in market capitalization by being transparent in its vision. Meanwhile, IBM has lost about $40 billion in market capitalization during the same span by not being transparent in its vision, and by reporting quarter-after-quarter losses in all major segments.
What IBM needs to do is combine all the junk that is weighing on its top-line and new segments to showcase the performance of its growing businesses. Most likely, IBM has not done so because the junk part is so large, and it has elected to minimize the losses by incorporating the strength with weakness.
But like MSFT, investors know that IBM is a long-term turnaround project. That is not the issue. The problem for IBM stock is an inability to see light at the end of this tunnel, or a clear vision from the company.
So, at the end of the day, IBM still doesn’t get it.
The company has all the makings of a stock that can trade higher if it would simply adopt what MSFT did to entice shareholders. Unfortunately, IBM management does not seem to realize this need, and for that reason, IBM stock will likely continue to trend lower.
As of this writing, Brian Nichols was long IBM stock.
