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IBM Earnings: Not Even Watson Can Help Big Blue (IBM)

IBM is feeling the pressure from yet another lackluster quarter

For the past two years, IBM (IBM) has been working hard on transforming its business. But as seen with the latest earnings report, investors are still not impressed. In Tuesday’s pre-market trading, IBM stock is off 5% to $142. That’s a steep decline from recent highs of $173 back in July.

IBMThe latest IBM earnings report tells same old story: The company still cannot figure out how to reinvigorate growth. During Q3, revenues plunged 14% to $19.28 billion, representing the 14th straight quarter of drops. The Street, on the other hand, was forecasting $19.62 billion.

The bottom-line was better, though. In the quarter, IBM reported adjusted earnings of $3.34 per share, which actually beat the consensus estimate by 4 cents.

But going forward, the prospects don’t look as good. The company lowered its full-year earnings guidance to a range of $14.75 to $15.75 per share, down from the prior forecast of $15.75 to $16.50.

As usual, IBM noted that there was adverse impact on revenues from the strong dollar as well as the unloading of various units (which means IBM can no longer report the revenues from the businesses). There has also been a steep drop-off in emerging markets because of the recent macroeconomic slowdown.

IBM Stock: An Old Dog Struggling to Learn New Tricks

The tech industry is undergoing tremendous changes, as seen with analytics, big data, cloud computing, social media and mobile. With huge amounts of venture capital sloshing around, there are many startups getting chunks of the revenues while IBM appears to be slumbering along.

But even some legacy tech operators are making things tough for IBM. Just look at Microsoft (MSFT). After several years of heavy investments, the company is starting to see lots of traction with its cloud offerings, particularly Office 365 and Azure.

Interestingly enough, holders of IBM stock should also be concerned with seemingly unlikely competitors, such as Amazon (AMZN). The ecommerce giant has leveraged its infrastructure to become a mega player in the cloud business. Of course, Amazon is also taking a low-cost approach, which is putting even more pressure on slow-moving rivals like IBM.

Granted, IBM stock is definitely much cheaper now. After all, the forward price-to-earnings ratio is only 9. By comparison, Oracle (ORCL) trades at a forward P/E ratio of 13, Microsoft sports a multiple of 15 and SAP (SAP) trades at 18 times forward earnings.

But then again, the multiple for IBM stock may be appropriate. Let’s face it, with growth stalling, doesn’t really deserve much of a premium. After all, Hewlett-Packard (HPQ), has languished at a 9x multiple for some time.

True, IBM has been showing some signs of progress with its moves into new categories, which the company calls “strategic imperatives — cloud, analytics and engagement” (engagement essentially meaning social media and collaboration).

During the quarter, the company’s strategic imperatives increased 17%. However, IBM did not provide an overall revenue number, so it’s difficult to get a sense of scale. But the company did indicate that total cloud revenues hit $9.4 billion for the trailing 12 months, which is certainly encouraging. Unfortunately, it is still relatively small for a company of IBM’s size.

Besides, the core legacy business of the company looks downright awful. In the quarter, Global Technology services bell by 10.2%, Global Business Services were off by 13.1%, Software dropped by 10%, Systems Hardware plunged by 38.7% and Global Financing fell by 8.1%.

So going forward, there is probably no need to rush into IBM stock. Prospective investors are better off waiting for signs that a turnaround is truly afoot.

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.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/10/ibm-stock-earnings-q3/.

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