It’s not how well the elephant tap dances that’s amazing, but that it taps at all. The old joke comes to mind as International Business Machines Corp. (NYSE:IBM) tries to wow the markets with blockchain, with a consensus earnings estimate of $5.17 per share when it reports Jan. 18, but
whispers of $5.22, on revenue of $21.94 billion.
If that sounds good, however, remember that hitting those estimates would still leave IBM short of 2016’s $79.9 billion in revenue, and that as recently as 2013 the company brought in $98 billion of revenue.
Worse, IBM’s operating margins have been shrinking steadily as its top line has shrunk.
If it can get those margins up, however, the turnaround will make IBM a powerful stock in 2018. That is what investors were betting on Jan. 17, with the stock rising 3% in early trading to about $169 per share, its highest level since last April.
Hidden Value in IBM
A growing IBM, or at least one with expanding margins, has ample room to grow in market cap. Even at $169 per share, the stock is trading at just 14 times earnings, absurdly low for a tech stock. The market cap of $155 billion is also less than twice the expected revenue number.
While the average tech share is up 35% over the last year, IBM is down 2%.
That’s the view of Barclays analyst Mark Moskowitz , who recently put a $192 per share price target on the stock, saying it could become a cloud applications winner alongside Amazon.com, Inc. (NASDAQ:AMZN) and Microsoft Corporation (NASDAQ:MSFT).
He had previously called IBM an underweight, with a price target of $133 per share. GBH Insights also likes the company’s near-term prospects and has a $180 price target on the stock.
The blockchain boom, which is different from cryptocurrencies in that we’re talking about a technology rather than an asset, is helping to power IBM. The company now has 1,500 employees working on blockchain applications, like a global payments solution using a cryptocurrency called Lumens.
Head Fake?
Still, IBM has had booms like this, which turned to bust when the hype hit reality. Remember Watson? That powered the stock through 2016, but you don’t hear much about it anymore, because it’s difficult to implement.
That is why our Luke Lango is fading this rally, expecting its high growth segments to slow and its slow growth segments to keep dragging it down.
But IBM is certainly signing some big, hopeful contracts. There’s its deal with Maersk to replace paper with blockchain in tracking container shipments, and its alliance with, among others, Wal-Mart Stores Inc (NYSE:WMT) to track Chinese produce using blockchain. Blockchain is also helping IBM internally, cutting paperwork in resolving disputes , according to our Tom Taulli. He likes the stock here.
James Brumley calls IBM a “fallen technology idol” but believes beating estimates for the quarter could give it time to make its work in artificial intelligence and quantum computing pay off.
The Bottom Line
A rising tide lifts all boats.
IBM still has assets. The asset base is up 4% over what it was a year ago, to $121 billion, and operating cash flow continues coming in at about $17 billion per year. CEO Ginni Rometty has succeeded in shifting IBM’s employment base overseas.
In today’s market, that may be enough. Think of IBM as Cognizant Technology Solutions Corp. (NASDAQ:CTSH) with patents and a mainframe monopoly it can still milk for profit.
That’s not going to be enough if the market turns down, but no one thinks that way right now.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT and AMZN.
