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International Business Machines Corp. (IBM) Stock Punished After Dismal First Quarter

IBM posted its 20th consecutive sales decline

This story has been updated with additional analysis.

It’s the same story for International Business Machines Corp. (NYSE:IBM) — that is, declining growth. This is certainly odd since the company is targeting massive opportunities, such as cloud computing, artificial intelligence (AI) and the Internet of Things (IoT).

International Business Machines Corp. (IBM) Suffers a Dismal First Quarter
Source: Shutterstock

Yet, as seen with the latest earnings report, the company has suffered another decline on the top line, off 1.3% to $18.16 billion on a year-over-year basis.

This marks the 20th consecutive drop! As should be no surprise, IBM stock is off about 4% in after-hours trading. This puts the year-to-date return at -2%.

But the top line was not the only issue with the latest quarter. IBM also reported a 13% drop in profits to $1.8 billion. Although, there was a silver lining: When excluding various one-time items, earnings came to $2.38 a share, which beat the Street by three cents a share.

Yet, this is little comfort for investors. After all, they have waited a long while for the restructuring to take hold.

UDPATE: Let’s face it, other old-line tech companies have been able to pull off a transition. Just some include Oracle Corporation (NYSE:ORCL), Microsoft Corporation (NASDAQ:MSFT), Adobe Systems Incorporated (NASDAQ:ADBE) and SAP SE (ADR) (NYSE:SAP).

IBM has issues on multiple fronts, and they could take time to resolve.

First, IBM has a portfolio of aging software and hardware systems. In Q1, the Systems division (which consists of hardware and operating systems) posted a 16.8% drop in revenues.

IBM also is being dragged down by its lumbering global services business, which saw quarterly revenues fall by 3% to $4 billion. The challenge is that there is less of a need for consultants because of the better integrations with newer technologies.

IBM’s far from doomed. A key part of the transition for IBM is the move to Strategic Imperatives, which includes categories like cloud computing, Big Data, security, mobile and social. In the latest quarter, the revenues from these sources came to $7.8 billion, up 12% on a year-over-basis. Note that this represents about 42% of all revenues.

The IBM earnings report also highlighted that cloud computing is the real sweet spot. In Q1, the revenues shot up by 33% to $3.5 billion.

This makes sense. IBM has plenty of advantages like a rock-solid global infrastructure, a wide assortment of mission-critical software systems and the Watson platform, which allows for deeper insights for customers (in the quarter, this business produced $4 billion in revenues). As a result, the company has snagged marquee customers like Workday Inc (NYSE:WDAY) and Salesforce.com, inc. (NYSE:CRM).

IBM stock also has the benefit of strong cash generation. In Q1, net cash flows from operations came to $4 billion. The company paid out $1.3 billion in dividends (the stock yields about 3.3%) and $1.3 billion in stock buybacks.

Bottom Line on IBM Stock

IBM trades at a reasonable valuation of about 12 times forward earnings estimates, versus 16 for ORCL and 20 for MSFT.

But it’s hard to see much upside if IBM can’t gin up its revenues, and soon. The legacy technologies remain too much of a dead weight.

In a CNBC interview after the earnings call, IBM CFO Martin Schroeter noted that “the portfolio will grow. I am confident that the IBM company will grow again.”

Perhaps. But with the long string of revenue declines, IBM is running low on credibility.

 

Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. 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, https://investorplace.com/2017/04/international-business-machines-corp-ibm-stock-punished-after-dismal-first-quarter/.

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