The past three years have been nothing less than miserable for owners of International Business Machines Corp. (IBM). IBM stock is currently down around 40% from its March 2013 peak, and there doesn’t appear to be any end in sight to the selling.
Of course, it’s not as if the weakness wasn’t merited. The IBM earnings and revenue reports since the beginning of 2014 have been getting progressively smaller — it’s the worst streak of non-growth IBM has seen in this era.
The company simply wasn’t ready for the advent of cloud computing and mobility.
Nothing lasts forever, though, and while it hasn’t helped the numbers yet, IBM has spent the past year-and-a-half reinventing itself.
But the question remains, is IBM stock finally buy-worthy? The IBM earnings report due this coming Jan. 19 could finally be evidence the company is back on a growth track.
IBM Earnings Preview
As of the latest look, International Business Machines is expected to post earnings of $4.82 per share on $22.04 billion in revenue for the recently completed quarter.
Those numbers don’t compare favorably to the year-ago levels when IBM posted a per-share profit of $5.81 on $24.11 billion in sales. To its credit, however, IBM is still topping estimates more often than not, even if those estimates are unimpressive ones.
All the same, it wouldn’t be crazy to at least entertain the notion that the organization, under the direction of CEO Ginny Rometty, has finally implemented enough change and enough deals to plug the sinking ship’s holes that she can actually start to bail water out of it again.
Case in point — Apple (AAPL). While IBM and Apple were mortal enemies at one point in 2014 the two paired up as a means of getting more iDevices into corporate offices and IBM into the app game.
It’s worked, too. By the middle of last year the partnership had developed 32 different business-oriented apps, and more are on the way.
A partnership with Apple is hardly the only new, cloud-based territory IBM is boldly moving into. In November, Rometty pegged cyber crime as “the greatest threat to every company in the world.” She’s since put the company’s money where her mouth is, announcing IBM’s acquisition of payment-fraud prevention outfit IRIS Analytics.
It’s hardly the first such acquisition International Business Machines has made of late, though. Since the beginning of 2014 the company has acquired 18 different outfits, most of which give IBM new cloud-based capabilities.
Sooner or later, something has to give. It runs the risk of losing its old-school server and software customers, and the pivot could be made this year. In fact, the pivot may have already been made.
3 Things to Mull About IBM
While the overarching story is the company’s transition away from yesteryear’s business lines and into the cloud space (and the hybrid cloud space in particular), a trio of specific themes or ideas are going to be doing most of the driving for IBM stock.
Be sure to pay special attention to the details on …
Weak Cloud Margins: Giving credit where it’s due, Credit Suisse analyst Kulbinder Garcha had the guts to stand alone, remaining pessimistic on IBM stock even if it can get its cloud business running well. His concern? Cloud computing is a lower-margin business than IBM’s traditional hardware/software lines, and could be on the verge of becoming an even more price-competitive business. Indeed, Microsoft (MSFT) just announced it was lowering the price tag on access to its Azure cloud platform in an effort to draw some business away from Amazon.com (AMZN).
Watson and Artificial Intelligence: If we’re speaking frankly, the development of IBM’s “Watson” platform a few years ago was interesting, but not many people saw Watson — which can store and process a massive amount of data — into a practical, revenue-bearing product. Now, though, with the advent of voice-activated assistants like Siri, Cortana and Alexa, the practicality of a thinking piece of machinery is becoming much clearer. This type of artificial intelligence will serve as a backbone of more future products than one might have first thought.
New Consumer Focus: IBM has never been wildly consumer-oriented, especially so since its exit from the PC business years ago. That’s about to change, however. For instance, the company is getting into the smart appliance game (a subset of the Internet of Things industry) via a partnership with Whirlpool (WHR); and is even throwing its hat into smart wearables area, teaming up with Under Armour (UA) to design clothing promoting individual health. In light of the FitBit (FIT) — and the subsequent implosion of FitBit — the world is looking for such solutions it can rely on.
Bottom Line for IBM Stock
International Business Machines has a future. In fact, it has a bright future.
It remains to be seen, however, if Tuesday’s earnings report will provide enough evidence of that bright future to make IBM stock worth taking a shot on now.
Even if Tuesday isn’t the day, though, IBM has all the right pieces of the puzzle in-house. Now it’s just a matter of putting them in the right place. That could happen anywhere between now and the end of 2017, which makes the stock something of a coin toss in the meantime.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
