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Will Bad News for IBM Stock Spread to Other Tech Giants?

Q3 sales for IBM fell short of analyst expectations


ibm stockIBM (IBM) just can’t seem to get its groove back.

IBM stock is down around 6% today, after IBM earnings were disappointing. The company reported revenue around $1 billion below Wall Street expectations and posted its sixth straight quarterly decline.

While there are certainly issues specific to IBM, there are also some brutal headwinds. As a result, poor IBM earnings and falling IBM stock may not bode well for other tech giants.

Just consider the fact that IBM beat on EPS estimates in the fourth quarter of 2012 and first quarter of 2013 … but it fell short in Q2.

As you can see in the chart below, in the quarters that IBM earnings were strong, other stocks in the sector performed well. Take a look:

Company Ticker Q4 2012 Stock Returns Q1 2013 Stock Returns Q2 2013 Stock Returns
Hewlett-Packard HPQ 14.55% 30.28% -11.52%
Microsoft MSFT 13.55% 23.10% -3.08%
Oracle ORCL 1% -5.5% 3.84%
Cisco CSCO 1.34% 25.66% -10.57%
Average 4% 15% -5%

Of course, IBM did beat the consensus estimate … but only reason was that there was a large tax benefit. And while recent does not necessarily mean that the company’s stumble will lead to negative returns for its main rivals, it’s at the very least a cause for concern.

See, the technology industry is undergoing a major disruption, as the growth in cloud computing is grinding away at legacy systems. Just look at the torrid growth of operators like (CRM), Workday (WDAY) and ServiceNow (NOW).

Plus, there have been a spate of IPOs in the industry, as seen with Veeva Systems (VEEV), RingCentral (RNG), ChannelAdvisor (ECOM) and Benefitfocus (BNFT).

The tech giants have been playing catch-up with acquisitions, but dealmaking is expensive and has really only offset the problems of cannibalization of existing revenue streams.

Another big headwind facing tech giants like IBM is the general uncertainty in global economies. The recent budget showdown in D.C. was not helpful, for one, since it likely reduced GDP and hindered gains in unemployment.

Even worse, it looks like the “deal” will only postpone big decisions until early next year. Given all this, it’s reasonable that CEOs will be hesitant to make big IT purchase decisions for the next few months.

But beyond that, the biggest headwind could actually be China. For IBM, this was the main culprit for the latest revenue miss. IBM noted that China is in the midst of forming new economic plans, which has resulted in a slowdown in IT spending.

On top of that, China may be gearing up for a tougher fight with America. This week the country’s top news agency put out commentary that made a call to “de-Americanize.” In other words, China could begin trying to protect its own tech industry — an approach would certainly be harmful for other tech giants.

The bottom line is that, as we move into earnings season, the risk-reward balance looks dicey. IBM is probably not going to be the only one to have a bad quarter, meaning IBM stock will not be the only equity that gets punished.

Thus, for investors in IBM stock rivals, it’s probably best to wait before making any moves.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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