Should Investors Sell IBM Stock?

As a component of the Dow Jones Industrial Average, International Business Machines (NYSE:IBM) stock gets a lot of attention due to its high dividend yield, which is currently  4.6%.

Why Some Investors Should Consider Selling IBM (IBM) Stock

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On July 17, IBM reported its second-quarter earnings.  Its earnings per share beat analysts’ average outlook,  but its top line came in below their average estimate. Overall, Wall Street’s reaction to Big Blue’s quarterly results has been muted.

In 2019, IBM stock is up about 24%, and now may be time for investors to take some of the impressive paper profits they’ve made in IBM stock. In the next several weeks, I expect IBM stock price to be volatile and to decline. Here are the most important things that investors should know about International Business Machines stock.

How IBM Makes Money

In recent years IBM has become a diversified company with a wide range of worldwide offerings, including IT hardware, software, and services. Five businesses generate revenue for IBM.

  • Cloud & Cognitive Software, which includes cloud and data platforms, cognitive applications and transaction-processing platforms.
  • Global Business Services, or GBS, which includes consulting, application management and global process services.
  • Global Technology Services, or GTS, which includes infrastructure and cloud services and technology support services.
  • Systems, which includes systems hardware and operating systems software.
  • Global Financing, which includes financing and used equipment sales.

Currently, IBM’s largest business segment is GTS. Going forward, management is aiming for Cloud & Cognitive Software to become a leading driver of the company’s revenue.

When investors look back at the earlier part of this decade, they may realize that IBM was not fully on top of developments in the tech space. Namely, IBM did not take enough steps to participate in the cloud, an industry that is projected to grow exponentially in the next few years.

Instead, management continued to concentrate on Enterprise IT, whose growth was and likely will be limited. IBM has also blamed external developments for the failure of its turnaround.

IBM stock price has reflected the subpar decisions of its management. From Apr. 2014 to Dec. 2015, IBM stock price fell from $200 to $120. In Feb 2017, IBM went back up to $180, only to hit $105.94 in Dec. 2018.

IBM ‘s Q2 Results Were Mixed

IBM’s top line continued to fall in Q2, declining to $19.16 billion from the $20 billion it took in during the same period a year earlier. The average top-line estimate  was $19.17 billion.

The company’s earnings per share came in at $2.81, a year-over-year increase of 8%.

Excluding certain items, its EPS was $3.17, compared to the average outlook of $3.08.

IBM CEO Ginni Rometty highlighted the growth of the company’s Cloud & Cognitive Software segment, whose revenue increased 3.2% to $5.6 billion.

However,  the revenue of Microsoft’s (NASDAQ:MSFT) Intelligent Cloud unit jumped 19% year-over-year, indicating that IBM is not yet able to compete with other dominant companies in this lucrative area.

Q2 was IBM’s fourth straight quarter without revenue growth. Moreover, the top lines of its systems and global financing businesses fell significantly.

Will IBM’s Most Expensive Acquisition Pay Off?

IBM’s management has been looking to revitalize the company  by making it a dominant force in open source and the cloud.In accordance with that goal,  in Oct. 2018 IBM announced that it would acquire Red Hat (NYSE:RHT), a well-respected, open-source, enterprise-software maker for $34 billion.

Well- known for its corporate version of Linux, Red Hat generates a great deal of revenue from the cloud.  But will Red Hat improve IBM’s fundamentals?

Red Hat has significant competitive advantages. And in several quarters, it may indeed become a catalyst that will contribute to the growth of IBM’s cloud business.

However, a prolonged trade war between the U.S. and China could adversely affect IBM stock price. Wall Street has also voiced concern that the global economy could be headed for a downturn.

Therefore, the rest of 2019 could prove somewhat bumpy for IBM stock. Don’t forget that IBM paid a hefty premium for Red Hat,  and that the deal was one of the  largest tech acquisitions of all time. On Aug. 2, IBM lowered its 2019 earnings guidance, citing an adjustment to its deferred revenue as a result of the Red Hat deal.

Additionally, IBM now plans to suspend its share buybacks in 2020 and 2021 while it works on decreasing the debt it accumulated from  the purchase of Red Hat.

The Short-Term Technical Outlook of IBM Stock

If you are an investor who pays attention to short-term technical charts, you may be interested to know that the charts of International Business Machines stock are painting an overbought picture and telling investors to be cautious.

In early June, IBM’s shares were trading around $127. Then came the stock market rally in which IBM participated. On Aug. 2, IBM shares reached a 2019-high of $152.95. And IBM stock price is now hovering around $141.

In other words, the shorter-term IBM stock chart points to volatility and some potential declines, possibly quite soon.

Considering how much IBM stock is up so far in 2019 and the current question marks in the broader markets, long-term owners of IBM stock should probably not hesitate to take some money off the table.

The most likely scenario is that IBM stock will spend some time between $125 and $145.

Until the company’s next earnings report in October, I’d expect the $125 level to act as major support.

On the other hand, $147.5 and then $152.5 are likely to act as near-term resistance.

The Bottom Line on IBM Stock

IBM stock price is likely to become increasingly volatile  in the near-term.

As a result, if you are one of the investors who bought IBM stock in early 2019, you may want to consider taking some of your profits.

However, if you do not want to sell your IBM stock due to its dividends, then you may want to stay the course and ride out any short-term volatility.

Alternatively, you may consider hedging your position. As for hedging strategies, covered calls or put spreads that expire on Sept. 20 could be appropriate, as straight put purchases are likely to be expensive due to the stock’s heightened volatility.

Finally, if you aren’t already long IBM shares, you may want to remain on the sidelines until you see a better opportunity to buy the shares on weakness. That strategy would also enable investors to benefit from higher dividend yields.

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

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