International Business Machines Corp. (IBM) Is Still a Buy … For the Patient

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IBM stock - International Business Machines Corp. (IBM) Is Still a Buy … For the Patient

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International Business Machines Corp.’s (NYSE:IBM) earnings results for the fiscal fourth quarter show that the turnaround efforts are starting to show results. Specifically, IBM pulled off a nice beat on both the top and bottom lines. But the reaction from Wall Street is muted, and IBM stock was actually wavering between slight gains and losses in Thursday’s aftermarket trading.

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For Q4, IBM generated adjusted earnings of $5.01 per share on revenues of $21.77 billion. Analysts were expecting profits of $4.88 per share on roughly $21.64 billion in sales.

Investors had already been anticipating improvement, evidenced by 11% gains in IBM stock since October — about double the S&P 500 in that time. But momentum is slowing, as you can see from the company’s dwindling Relative Strength Index (RSI) in the chart below.

IBM stock chart

One thing IBM didn’t do was end its streak of consecutive revenue declines. Despite the top-line beat, revenues were off by 1%, marking the 19th straight quarter that sales have dipped.

UPDATE: At the core of the transformation is strategic imperatives, which account for 41% of revenues. The segment saw a 13% increase in revenues in 2016 to $32.8 billion.

A major driver of the growth is the IBM cloud business, which posted a nice 35% jump in revenues last year to $13.7 billion. Cloud as-a-service revenues were up 61%.

IBM has some big-time advantages here, including a trusted brand, global footprint, decades of experience in handling mission-critical functions and thousands of highly talented engineers.  What’s more, the global consulting unit has been important, which has provided lots of business with cloud deployments with companies like Workday Inc (NYSE:WDAY) and Salesforce.com, inc. (NYSE:CRM).

Another critical part of the strategic imperatives side of IBM is Watson, which is the pioneering system for artificial intelligence. Some of the diverse use cases include customer service, the internet of things, financial services, weather forecasting, regulatory compliance and cybersecurity.

To put all this into perspective, IBM spent more than $15 billion in R&D and acquisitions for strategic imperatives in 2016. But the company still was able to deliver nearly $9 billion to shareholders in dividends and share repurchases. The current yield on IBM stock is 3.4%.

So, why is IBM stock showing weakness in after-hours trading?

Concerns About IBM Stock

Shares have already rallied strongly, as we mentioned before. But there also are lingering concerns about the core business.

The fact is IBM has a number of technologies that are getting … well, crusty. They’re based on old approaches, including on-premise installations. Furthermore, there is quite a bit of hardware in the IBM portfolio. During the latest quarter, Global Business Services revenues fell by 4% to $4.1 billion, Systems plunged by 12% to $2.5 billion and the Software unit saw only 1% growth to $7.1 billion.

IBM also must deal with the classic problem of disruption. A little good news there, though: IBM has been transforming to adapt over the past couple of years. Investors who are surprised by this surprise me — IBM is a tech company that has been around for more than a century. Of course it’s agile.

Just don’t expect a rapid comeback. Moving an organization of IBM’s scale isn’t easy.

Tom Taulli runs the InvestorPlace blog IPO Playbook and is a registered investment adviser representative (you can visit his site to learn more about his financial planning services). He is also the author of various books on investing like All About Commodities, All About Short Selling and High-Profit IPO Strategies. 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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Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2017/01/international-business-machines-corp-ibm-stock-q4-earnings/.

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