Shares of International Business Machines Corp. (NYSE:IBM) haven’t done too well this year, but that’s not much of a surprise. The company hasn’t grown its quarterly revenue in over five years, with 21 consecutive quarterly sales declines. Who’s going to pay a premium for that? Since August though, IBM stock price has actually been on the move, climbing about 5% since the middle of the month. Are trends reversing?
That depends by what “trend” one refers to. The trend of IBM stock price might be improving. But I wouldn’t say the underlying fundamentals are getting much better.
International Business Machines
Analysts expect the revenue slide to continue. Estimates call for a 2.7% decline this year and a further 0.2% erosion in 2018. Let’s say that’s true and it’s spread out equally among each quarter. IBM shareholders would be in for six more quarterly sales declines. Although, the 0.2% decline in 2018 is admittedly as close to a bottom in sales as IBM’s been in a long time.
Honestly, it doesn’t get much better on the earnings front. Analysts expect just 1.2% growth this year and 0.6% growth in 2018. Operating margins continue to contract, now down about 25% from year-ago figures. On a trailing basis, they’re the worst margins since 2009. Same story with free-cash flow, operating cash flow and total debt.
Is it any wonder shares trade at just 10.5 times forward earnings estimates? With rising debt, falling margins, five years of declining sales and earnings growth that’s only stagnant because of the big buyback define Big Blue today.
Are there positives? The IBM stock dividend is one, which now yields 4.1%. The other is that IBM has a payout ratio of less than 50%, meaning it can continue to pay its dividend and even raise it should management decide to.
The IBM Way
Overall, the underlying business is struggling mightily and I’m wondering when CEO Ginni Rometty’s plans will finally reveal any successes. The hope is that it’s at least close to a bottom. IBM’s been touting its supercomputer, Watson, for years now. It’s failed to light a notable spark in the stock price or in sales. Will it ever?
Watson is a supercomputer geared toward A.I., a new wave of technology that almost everyone in tech thinks will be the next big thing. However, Nvidia Corporation (NASDAQ:NVDA), Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT), Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG), Apple Inc. (NASDAQ:AAPL) and seemingly every other big tech player is putting a focus on A.I. Can IBM really topple these companies and emerge as an A.I. leader? Doubts are justified, although it’s possible.
Further, we recently covered IBM’s potential in a new technology known as blockchain. Blockchain, the technology necessary for bitcoin and cryptocurrencies, is quickly making its way through big banks and how they process transactions. This could be a big potential for IBM, which some consider a leader in blockchain.
One could argue that IBM has dropped the ball with Watson. Will it do the same with blockchain? That’s the worry with this emerging industry, too.