IBM Exposes Tech’s Weakness

It's a sector-wide warning: Sluggish global growth is taking a toll

By Tom Taulli, InvestorPlace Writer & IPO Playbook Editor

On news of its third-quarter earnings report, IBM’s (NYSE:IBM) shares are off about 4% in Wednesday morning trading. While the company is in a much better position than other mega tech operators, such as Hewlett-Packard (NYSE:HPQ) and Intel (NASDAQ:INTC), the fact remains that even Big Blue cannot avoid the slowing global economy.

In Q3, IBM posted earnings per share of $3.61, which actually beat the Street consensus by one penny. Yet revenue was disappointing, falling by about 5% to $24.7 billion. The consensus was for $25.3 billion. Actually, it was IBM’s fifth consecutive revenue miss.

Microsoft Takes a Page From Apple’s Book
Microsoft Takes a Page From Apple’s Book

But the real issue for investors was the guidance. IBM merely reaffirmed its EPS for fiscal 2012 at $15.10. Keep in mind that the company has a habit of upping its forecasts.

A variety of reasons account for the weakness. For example, IBM had to deal with the rising value of the dollar, especially against the euro. It also lost revenue from the sale of its automated cash register business, which Toshiba bought.

Yet such things are really just noise. The key issue for IBM is the sluggish global economy. And the weakness has been broad-based.

No doubt, it’s easy for customers to push back on purchases of expensive technology and services. In fact, on IBM’s conference call, CFO Mark Loughridge indicated that this was the case in Q3.

This should be ominous for other tech companies. Consider that Citrix Systems (NASDAQ:CTXS), Red Hat (NYST:RHT) and VMware (NYSE:VMW) are seeing declines of 2% to 3% in today’s trading. Even some of the cloud operators, such as (NYSE:CRM), are seeing weakness.

Again, IBM is still solid company. It was smart to unload commoditized businesses (such as PCs) and instead focus on high-margin categories like software. Big Blue also continues to bolster its mainframe segment. It’s new System z platform is likely to benefit from the long-term growth in cloud computing.

Yet investors should be cautious because the revenue problems are likely to continue for a while. Besides, IBM’s dividend is only 1.6%, and its price-to-earnings ratio isn’t cheap, coming to 15x. So, it’s probably better for investors to hold off on IBM — as well as on the rest of the mega tech players, which will also likely feel the pain from the global economy.

Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook.”  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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