Is International Business Machines Corp. (IBM) Stock in Danger?

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IBM stock - Is International Business Machines Corp. (IBM) Stock in Danger?

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International Business Machines Corp. (NYSE:IBM) pulled off a solid 2016, with IBM stock up about 16% to beat the broader market.

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However, the stalwart IT company faces an early test in 2016 — its fourth-quarter earnings report, which is slated for Thursday after the market closes.

The biggest question many analysts and investors have heading into Thursday: Can the company’s restructuring get the fundamentals back into gear?

What to Expect From IBM Earnings

Well, Wall Street hasn’t set the bar too high.

IBM earnings are expected to reach $4.88 per share — up just 4 cents on a year-over-year basis. Revenues are forecast to hit $21.6 billion, a 2.3% dip that would extend IBM’s streak of sales declines to 19 consecutive quarters.

That said, a decline in revenues shouldn’t be alarming. IBM is moving toward cloud computing, which means moving from charging customers on a one-time basis to a subscription structure. The plus side? Predictable revenues. The downside? IBM is restricted in how much it can report.

If this sounds familiar, it’s the predicament Adobe Systems Incorporated (NASDAQ:ADBE) found itself in a couple years ago. However, their switch to more of a subscription model has gotten the company back on a growth path. The transition merely needed to take its course.

So IBM stock holders will be awfully interested in seeing how the cloud business is performing. Here, there’s reason to be upbeat. In Q3, revenues in this segment jumped an impressive 42% to $3.4 billion. You can thank numerous advantages to being an established tech giant like IBM, such as a trusted brand, a wide assortment of mission-critical software systems and a large high-end consulting business, which has helped with deployments for companies like Salesforce.com, Inc. (NYSE:CRM) and Workday Inc (NYSE:WDAY).

Another core driver is Watson, which continues to make strides in the megatrend of artificial intelligence. Already, IBM has leveraged this technology into growth areas including customer service, the internet of things, financial services, weather forecasting, regulatory compliance and even cybersecurity.

IBM Stock: The Risk Factors

On the flip side, IBM still has much to do before the turnaround can be considered complete, and a number of headwinds could hinder the momentum.

The market for cloud computing is getting crowded and more intense. Just a short list of major competitors includes Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN) and SAP SE (ADR) (NYSE:SAP).

But investors shouldn’t count out other worries.

For instance, there’s uncertainty regarding Donald Trump’s policies regarding trade, as well as concerns about the soaring dollar (which Trump recently nodded to). Both of these are issues that will cause problems for many U.S. multinationals, including IBM.

Something else: IBM is beset with legacy businesses, such as hardware systems and on-premise software, that are expected to deteriorate even further.

To put it kindly, IBM is a juggling act.

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.

Some Wall Street analysts aren’t convinced that IBM is getting up to speed. Credit Suisse’ Kulbinder Garcha, for instance, believes earnings will take a hit this year. That’s why he slapped a dismal $110 price target on IBM stock, implying a 34% decline from current levels.

Bottom Line on IBM

I think any extreme bearishness on IBM stock is overblown. Wall Street has been rightly factoring in sluggish growth, and it seems all too aware that a turnaround will take time. The forward price-to-earnings ratio on IBM is just 12, compared to 19 for Microsoft and 20 for SAP.

Turnarounds can be choppy. But when results begin to materialize, the stock can get legs in a hurry, as Hewlett Packard Enterprise Co (NYSE:HPE) shareholders would attest. HPE stock is up about 80% over the past year.

Patience can pay off, and I believe this will be the case for IBM stock.

Just ride out the earnings volatility for now, and IBM’s traction in the cloud and AI will eventually make things right.

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

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