On Monday, International Business Machines Corp. (IBM) surprised Wall Street with better-than-expected first quarter earnings. Following the release, IBM stock lost nearly 5% as many continued to question the company’s turnaround plans.
IBM’s earnings came in at $2.35 per share, surpassing analysts’ forecast of $2.09 per share. Revenue was also higher than expected at $18.7 billion, but traders were still wary as that figure marked the 16th straight quarter in which revenue declined.
Compared to the previous years’ figures, IBM’s revenue fell 4.6%, and profit dropped an even more worrying 13.5%.
The silver lining for IBM was its new business growth, or “strategic imperatives,” which includes initiatives like data analytics, cloud computing and artificial intelligence. Those parts of the business grew 14% over the past year. IBM’s cloud computing arm led the pack, turning in an impressive performance with revenue up 34%. The improvement indicated that firm’s shift from being a hardware provider to offering software and cloud-based services was proving to be successful.
However, IBM’s cognitive computing arm turned in a less promising performance, with revenue falling 1.7%. This part of IBM’s business has been hailed as revolutionary and includes a supercomputer called Watson that is capable of machine-learning. Many believe Watson’s ability to sort through reams of data and identify patterns could transform the healthcare space by helping hospitals cut down on costs and giving doctors a new way to identify effective treatments for their patients.
However, Monday’s earnings report suggested that there’s still a long way to go before Watson powers IBM stock forward.
IBM’s Systems group, which includes computer hardware, saw revenue decline 22% to $1.7 billion. That weakness in the firm’s core business is one reason Big Blue has been struggling over the past five years. Consumers have shifted away from traditional browsing and most big firms are transitioning to cloud-based operations, making IBM’s transition away from hardware an essential one.
What to Do With IBM Stock
This week’s earnings showed that IBM’s turnaround is far from being successful. At the moment, IBM’s weaknesses are still overshadowing its improvements, and the firm’s growth rate has suffered as a result.
Most are expecting IBM to be successful in transitioning, but its turnaround won’t be without growing pains. The company is likely to continue struggling for the remainder of this year, with some predicting that the company’s revenue won’t improve until 2018.
IBM CFO Martin Schroeter commented that the company will continue to focus on ensuring its employees have the skill sets necessary to grow IBM’s strategic imperatives. Although IBM has let thousands of employees go over the past year, Schroeder says overall employment is likely to remain flat as to company hires new talent.
IBM spent $3.6 billion on capital expenditures and acquisitions during the first quarter, suggesting that the firm is planning to continue buying smaller firms with expertise in areas that will benefit its strategic imperatives. Last year, Big Blue spent $9 billion buying up smaller companies that specialize in things like cloud computing and cybersecurity.
While IBM’s first-quarter earnings release showed that the firm’s turnaround is still on very shaky ground, many investors may jump at the chance to buy the small dip on the market’s initial reaction to the results.
Prior to Tuesday’s open, IBM shares were up 11%, trading at $152 per share after falling as low as $117 in February. This week’s earnings have provided reason to believe another big drop could be in IBM’s future as the firm continues to struggle through a transition period.
But one man’s struggle is another man’s value. Wall Street isn’t taking into account the company’s long-term potential, and IBM stock should be considered a bargain once the firm re-emerges as an industry leader in key industries.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
