There’s a lot of reasons to not be in love with International Business Machines Corp. (NYSE:IBM). We’re all just wondering how many quarters can go by in a row where IBM fails to grow revenues. That has been one of the primary anchors to IBM stock, and that will continue for yet another quarter thanks to Tuesday evening’s second-quarter earnings report.
Fiscal 2017 is tracking a 2%-plus decline, analysts say, but maybe there’s hope in 2018, where analysts believe IBM will shed just 0.2% on the top line.
But for now, don’t hold your breath … and don’t bother with IBM stock.
IBM’s Second Quarter
To no one’s surprise, IBM’s revenues declined on a year-over-year basis for a 21st consecutive time. Sales came to $19.3 billion, off by 4.7%, and worse, below analyst expectations for $19.45 billion.
IBM does have a positive streak to boast — an 11th straight beat on the earnings side. International Business Machines reported a $2.97-per-share profit, easily topping expectations for $2.74. And that net income represented a 7% year-over-year improvement.
The company is maintaining its full-year non-GAAP earnings per share forecast (at least $13.80) and free-cash flow expectations. That’s good news for investors, who have a bit more transparency on what to expect through the rest of the year.
From Chairman and CEO Ginni Rometty:
“In the second quarter, we strengthened our position as the enterprise cloud leader and added more of the world’s leading companies to the IBM Cloud. … We continue to innovate, adding regtech capabilities to our portfolio of Watson offerings; developing solutions based on emerging technologies such as Blockchain; and reinventing the IBM mainframe by enabling clients to encrypt all data, all the time.”
International Business Machines has six business segments: Cognitive Solutions, Global Business Services, Technology Services & Cloud Platform, Systems, Global Financing and Other. Each reported a year-over-year decline in revenue and gross profit margin. Meanwhile, long-term debt grew by roughly 10% over the quarter.
This isn’t exactly a gold standard of tech. Investors are already showing their displeasure, sending IBM stock down 2% in Tuesday’s after-market trade.
If that holds at the open, shares will be staring at a double-digit year-to-date loss.
Going Forward
The company’s emerging business segments show promise. IBM’s efforts in artificial intelligence (Watson) look promising. But the legacy business is a weight around the company’s neck.
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Should International Business Machines break up? Perhaps it should, although it’s hard to imagine anyone really wanting the declining mainframe and operating systems software businesses.
HP Inc (NYSE:HPQ) split off Hewlett Packard Enterprise Co (NYSE:HPE), which has since executed spinoffs of its own. That created value for shareholders despite the sagging PC business.
On the upside, IBM shares trade at just 11 times earnings and now yield close to 4%. But for that low of a valuation, I’d prefer to put my money into a business where I know where growth is coming from — say, Delta Air Lines, Inc. (NYSE:DAL) or Southwest Airlines Co (NYSE:LUV).
And that dividend, while substantial and growing, hasn’t been enough to mask gross outperformance. On a total return basis, IBM shares have returned just less than 70% over the past decade. That’s well short of the broader market, which has nearly doubled. The more tech-heavy Nasdaq-100 — represented by the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) — is up 215%.
Bottom Line on IBM Stock
International Business Machines is off about 15% from its highs earlier this year, and it sports a nice yield and decent valuation. But its lack of growth — and lack of vision about when and how that growth will return — are almost startling at this point. Technology companies have been pummeled for less, but IBM has enjoyed a long stay thanks to its deep financial resources and sheer scale.
For this type of valuation, I’d rather be somewhere else — preferably in a different sector. But even within tech, Apple Inc. (NASDAQ:AAPL) sports a similarly low valuation, and it’s plain to see which of the two has more upside potential at the moment.
IBM is rudderless right now. Its forays into the cloud have come too little, too late. IBM stock has become a “show-me” holding, and for its second quarter, IBM didn’t show us much to be excited about.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
