International Business Machines Corp. Stock Is Soaring Post-Earnings, But Can This Rally Last?

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Contrary to its boring, blue-chip image, International Business Machines Corp. (NYSE:IBM) took off the runway mid-week. Market sentiment turned decisively positive when the iconic computer manufacturer submitted better-than-expected earnings results for the third quarter. More importantly, the report suggested that the company may have a chance to solve its revenue-growth woes, thereby spiking up the IBM stock price.

IBM Stock Is Soaring Post-Earnings, But Can This Rally Last?

Against a consensus estimate of $3.28 per share, IBM stock came in at $3.30.

 

Top-line sales registered $19.15 billion, almost 3% higher than projected estimates of $18.6 billion. Although results in this Q3 weren’t enough to stop sequential quarterly losses (this is the 22nd consecutive quarter of revenue declines), the company delivered the goods on emerging businesses.

Sales from its cloud-computing division were a major win for the venerable firm, coming in at $4.1 billion. This represents a 20% year-over-year growth rate. Irrespective of what the IBM stock price today is, the cloud is where the company will make its critical pivot. Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT) and Alphabet Inc (NASDAQ:GOOG,NASDAQ:GOOGL), among others, view the cloud as ground zero for tomorrow’s digital innovations.

Thus, overall revenue declines don’t carry as much concern if the drought is pegged to legacy operations. Wall Street frequently divests unproductive assets as organizations today become increasingly streamlined.

Still, analysts criticize the IBM stock price today, and for good reason. At these levels, shares appear overvalued. Following the Q3 earnings report, IBM closed up nearly 9% against the prior session. It also blew through all manners of technical support and resistance levels.

I’ve said this before, but it’s never easy to invest in something that recently put up thunderous numbers. Is this the start of a substantive rally, or should buyers wait for a better entry point?

IBM Stock Still Has Difficult Challenges

InvestorPlace contributor Luke Lango is one of the doubters. Although proponents have something to cheer about in terms of revenue growth, the actual dynamic features much give-and-take. For instance, the majority of IBM’s sales are “in secular decline, and it will remain so.” Thus, net growth must come from the rising star of the company’s “Strategic Imperatives.”

Unfortunately, while this key segment is growing, its pace has decelerated. The reasonable expectation is that growth will be modest moving forward. At the end of the day, the IBM stock price depends not only on bullishness in Strategic Imperatives, but also mitigating secular bearishness in its legacy divisions. As Lango notes, this isn’t the most exciting proposition for potential buyers.

There’s also the little problem about technical momentum; that is, IBM stock doesn’t have any. Lifetime (going back to 1962), the computer giant’s day-over-day price movement averages 0.04%. The near-9% move following Q3 is the biggest swing in IBM this century. Moreover, this is the 18th-highest daily gain in company history.

To add context, the single largest swing in the IBM stock price was 13.2%, registered back on April 22, 1999. Perhaps some of our younger readers weren’t even born yet. Also, the difference between the record and this past Wednesday’s share price is a mere 49%.

To sum it all up, IBM stock just doesn’t move. The implication is that diving into shares after a multiyear record is extraordinarily risky.

Bold Opportunities Ahead for IBM Stock

Despite some cautionary notes, I’m optimistic about the iconic firm. For one thing, the average date of IBM’s top 20 daily price moves is February 1995. This statistic tells me that we’re comparing the IBM stock price today to a different era in corporate history. In other words, the overall weakness in shares is likely related to the transition from old IBM to new IBM.

Therefore, historical comparisons may not always yield great results. I’m not just referring to technical analysis. Even seemingly innocuous remarks such as “boring, blue-chip company” could present its own risks.

As previously mentioned, IBM is shedding its legacy image of hardware provider to a Software as a Service (SaaS) solution. It’s also making significant inroads into blockchain, the revolutionary architecture that drives Bitcoin and other cryptocurrencies.

As our own Bret Kenwell writes, blockchain can perfectly align with IBM’s SaaS business solutions:

“In November 2016, Tom Rosamilia, the senior vice president of IBM Systems, spoke about various blockchain applications from IBM’s perspective. He spoke of mobile transactions in the $30 billion-per-day range. He mentioned Wal-Mart Stores Inc (NYSE:WMT) and its food supply chain in China, minimizing contamination and pinpointing exactly where contaminated strands came from. Perhaps they should call Chipotle Mexican Grill, Inc. (NYSE:CMG). He also talks about logistics operations being improved as well.”

It’s not an immediate panacea for IBM stock. Management will still need to execute, which Kenwell explains is a lingering problem. However, no paradigm-altering transition occurs without challenges. If IBM can hold it together, shares are likely to surprise to the upside.

Josh Enomoto is long Bitcoin.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/international-business-machine-corp-ibm-stock-rally/.

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