Back in July of this year, International Business Machines (NYSE:IBM) stock holders had pinned their hopes on the company’s acquisition of Red Hat. Granted, it was an expensive purchase at $34 billion, but this was supposed to make IBM stock a power player in the cloud-computing space.
Since that time, investors have gotten seasick as they’ve watched IBMstock churn up and down between $130 and $150. Making matters more difficult was the blow dealt to the IBM stock price with the company’s disappointing third-quarter earnings results; were investors wrong to place their bets on IBM as a cloud-computing contender?
Red Hat Might Not Be Enough to Buoy IBM Stock
As I suggested earlier, the Red Hat acquisition was supposed to be a major catalyst for IBM as the company strives to capture market share in the cloud-computing niche. I can’t blame the company for wanting to focus on the cloud, as I believe that this will continue to be a growth industry in the coming years.
Of course, some sectors of the economy are adopting cloud computing faster than others. For instance, a study on AI start-ups conducted by Boston University’s James Bessen and Lydia Reichensperger and New York University’s Stephen Michael Impink and Robert Seamans discovered that “[a]lmost all the startups report that their products are cloud-based (97%) although 33% of the firms additionally provide software on premises. Only 3% of the firms provide software on premises only.”
As more millennials start their own tech-infused business ventures, IBM may indeed be poised to capitalize on the cloud-computing revolution. International Business Machines stock investors, however, might not be willing to wait long enough for the company to make inroads into this niche; they want to see results now and the Red Hat acquisition might not be enough to boost the IBM stock price this year, or even next year.
A Persistent Problem
In my estimation, one acquisition won’t be sufficient to cover up the gaping hole that IBM has been facing for a while now: a lack of revenue growth. The company’s disappointing third-quarter earnings report revealed that IBM revenues decline for the fifth consecutive quarter — an unacceptable setback, if you ask me.
IBM stock holders found it unacceptable as well, and they expressed their displeasure by sending the stock price down 5% after the announcement. I wouldn’t call it a horrendous miss — $18.03 billion in actual revenues compared to $18.22 billion in projected revenues for the third quarter. But it’s the continuation of a disconcerting trend that a foray into the cloud might not be able to fix.
Besides, there’s more to IBM than just its cloud segment. Indeed, the global technology services segment is IBM’s biggest, and it was reported as being down by 5.6% compared to the same period the prior year. My reaction to this news mirrors that of IBM’s finance chief, Jim Kavanaugh, who admitted that the global technology services segment “is high-value, high-profit, and when it hurts you at the latter part of the month … it definitely falls to the bottom line.”
And that’s what concerns me more than anything else when it comes to IBM: its bottom line. Red Hat or no Red Hat, investors want to see in improvement in net profits; without that, I fully expect the International Business Machines stock price to flatline or decline well into next year.
The Takeaway on IBM Stock
The cloud is the future: you’ve heard it before and I don’t mind saying it again. However, IBM stock holders need the company to improve its bottom line today, not next month or next year; until they see stronger revenues, don’t expect to see a silver lining on this cloud.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
