The Numbers Just Aren’t Good Enough for IBM Stock

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IBM stock - The Numbers Just Aren’t Good Enough for IBM Stock

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Yesterday, IBM (NYSE:IBM) reported better-than-expected first-quarter numbers, and yet, IBM stock fell in response.

Sound familiar? Same thing happened last quarter. IBM reported better than expected Q4 numbers. IBM stock fell.

By now, it should be pretty clear what is happening here.

The numbers just aren’t good enough to support the current valuation on IBM stock. Regardless if the company tops quarterly expectations or not, IBM’s revenue growth is too anemic, its margin problems too large, and its valuation too full to allow the stock to run much higher.

That is why IBM stock hasn’t really gone anywhere over the past year. In the $150 to $160 range, the current growth trajectory just doesn’t support much more upside.

Here’s a deeper look:

IBM Cloud Not Enough

I’ve pointed out time and time again that the big problem with IBM is that its hyper-growth business (Strategic Imperatives) is slowing, while the rest of the business is declining at a quickening rate.

That is exactly what happened this quarter.

The company’s Strategic Imperatives businesses, which are headlined by IBM Cloud, grew by just 10% in constant-currency. That is slower than it was last quarter (+14%) and in the year ago ago quarter (+13%).

This slowdown isn’t due to one dragging segment. It is a broad-based slowdown across all of the company’s growth segments.

IBM Cloud was up just 14%, which is pretty anemic for the cloud industry. That also represents a huge slowdown from last quarter (+27%). The analytics business was up 4%, versus 6% growth last quarter. The mobile business was up 14%, versus 21% last quarter. The security business was up 60%, versus 127% last quarter.

The slowdown in these businesses will persist throughout the year thanks to the company coming up against some tough laps. As such, IBM’s Strategic Imperatives growth rate will continue to erode over the next several quarters.

Meanwhile, the rest of the business is still in free fall. Despite Strategic Imperatives growing by 10% and accounting for nearly half of revenues, IBM’s total revenue growth rate in the quarter was a big flat zero percent.

IBM Stock Isn’t Worth $150

Over the next several years, not much will change about the current dynamics underlying IBM stock. The company’s growth segments will continue to slow. Its non-growth segments will keep falling. And its margins will remain under pressure due to the company being forced to invest big in order to sustain even anemic top-line growth.

All together, this company doesn’t have a robust growth trajectory.

I’ve been saying for a while now that this is a 0-1% revenue growth story with flat margins over the next 5 years. I’m sticking with that projection today. If revenue does grow by 0.5% per year over the next 5 years, that would put revenues at just over $81.1 billion in 5 years. If pre-tax profit margins stabilize around 20% over the next 5 years, then that would imply pre-tax profits of $16.2 billion in 5 years.

Taking out 12% for taxes and dividing by a presumably reduced share count of roughly 825 million, you arrive at earnings per share in 5 years of roughly $17.30.

IBM stock normally trades around 10- to 11-times forward earnings. A 10.5x forward multiple on $17.30 earnings implies a four-year forward price target of roughly $182. Discounting that back by 10% per year, I arrive at a present value for IBM stock of under $130.

Bottom Line on IBM Stock

This is a weak and only weakening story. At $150, IBM stock is more appropriately priced than at $160 and up. But I’m not comfortable buying this name until it dips further, preferably to the sub-$130 range as it did in early 2016.

Until then, I think this is a name to punt on.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/numbers-just-arent-good-enough-international-business-machines-corp-stock/.

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