The bulls were confident on IBM (NYSE:IBM) ahead of the company’s fiscal first-quarter earnings results, with shares rallying 2% into the print. However, IBM stock did not reflect that sentiment once the company reported, despite beating on earnings and revenue estimates.
Shares of IBM fell 5.7% in Tuesday’s after-hours trading session, down to $151.73. It’s down 6.3% in Wednesday’s session. That could be good news for traders, though, as it puts IBM’s stock near the bottom of its recent trading range.
Trading IBM Stock
In our feature highlighting the top trades in the upcoming session, we pointed out that IBM stock was poking out of the trading range it’s been in since October. The move was encouraging, and as the yellow circles indicate on the chart below, shares were not overbought and had bullish momentum.
Had it not reported earnings, it very well could have kept going. That’s particularly true if tech stocks stayed in favor, something that became possible once Netflix, Inc. (NASDAQ:NFLX) smoked its earnings report and the rest of FANG was moving higher.
In any regard, IBM did report earnings and they were met unfavorably. This could always change as the trading session progresses Wednesday, but for now, we have to trade what’s in front of us.
As you can see on the chart above, two rough ranges for the stock have been between $148 and $160. Over $160 and shares were looking good.
That $148 level, however, held through two market corrections in February and late March. With the 200-day moving average at $150, there’s plenty of support nearby for Big Blue.
Aggressive investors can buy now with both support levels just below current levels. They can bail on the position should it close below them both.
IBM Earnings
So what did IBM earnings look like? Earnings per share of $2.45 came in 4 cents ahead of analysts’ estimates. Revenue of $19.08 billion grew 5.1% — yes, 5.1% for IBM, the company that went more than five years without quarterly year-over-year (YoY) sales growth! — and came in $280 million ahead of consensus expectations.
Management said it expects free cash flow of at least $12 billion for 2018 to go along with minimum earnings per share of $13.80. Consensus expectations call for full-year earnings of $13.84.
So IBM came up 4 cents short on its earnings guidance … big deal right?
Some investors are pinning the after-hours decline on that miss. If that’s the case, I’d look for a bounce in IBM sometime soon, for two reasons. One, management said “at least” $13.80. If this were a range and management said earnings of $13.80 to $13.90, this wouldn’t even be a discussion. Second, we’re talking about coming up four cents short on almost $14 — it’s barely 0.25%.
If this is the ruckus investors are raising, ignore it. This is a nothing-burger.
But here’s the other problem: On a GAAP basis, net income (earnings) actually fell YoY, rather than grew 4% as its non-GAAP results would suggest. The 5% bump in total revenue was good, but it’s the result of a more favorable forex situation rather than operational gains. Finally, despite this 5% bump in revenue — almost $1 billion for those keeping tabs — both GAAP and non-GAAP gross margins declined YoY and missed analysts’ estimates.
The Bottom Line
There are positives at IBM, despite the somewhat bleak results on Tuesday. IBM CFO Jim Kavanaugh talked up IBM’s Watson as an A.I.-leading business tech platform. The company grew cloud revenue 20% YoY and IBM blockchain solutions remain as another potential growth lever in the future.
But all of this “potential” and failing to realize it is what’s weighing on IBM. That’s not to say that enterprise cloud is a fail or that Watson is a bust. It’s just to say that, despite IBM stock trading at 11.5 times earnings and yielding almost 4%, it hasn’t budged in years. Its share price was at this same level at the start of 2012.
All the while, Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), Microsoft Corporation (NASDAQ:MSFT), Alibaba Holding Group Ltd (NYSE:BABA) and Salesforce.com, inc. (NASDAQ:CRM) have all taken advantage and found strong growth in various tech industries. IBM continues to miss the train and while the valuation is cheap, there are many more attractive alternatives.
These results were far from horrendous, but this so-called turnaround has been going on for years. Investors are simply losing patience and starting to look elsewhere.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a long position in GOOGL and CRM.
