The Modest Recovery of IBM Stock Is Continuing , But Bigger Gains Could Be Coming

IBM (NYSE:IBM) reported its third-quarter earnings after the bell on Oct. 16, and the result was an immediate punishment of International Business Machines stock. After the company’s earnings came in well below analysts’ average outlook, IBM stock dropped 5.5%, and investors kept up the heat for several more sessions, with IBM stock price eventually hitting $132.58 before beginning a modest recovery. IBM stock later tacked on a couple more dollars, and IBM stock price is now around $134.50.

If You're Looking at IBM Stock, Hold off as It Is Likely to Head Lower
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The market seems to be in a cycle of punishing IBM after the company posts its earnings, then becoming more optimistic that the company is turning things around, fueling a recovery of IBM stock price.

If that pattern is set to continue, then now would be a good time to consider buying International Business Machines stock. The current IBM stock price is down around 10% from the $151.36 it hit before it slid in the wake of its Q2 earnings at the end of July. 

That being said, there’s a larger-scale pattern at play that needs to be considered as well.

Will IBM Stock Price Ever Take Off Again?

Longtime International Business Machines stock investors have had a rough go under the leadership of current CEO Gini Rommety. Since she took over the company’s reigns at the start of 2012, IBM stock price has lost over a quarter of its value. As The Wall Street Journal pointed out, not only was Q3’s revenue decline the fifth in a row for IBM, but it was the 27th quarterly top-line decline overseen by Rommety. That poor record reflects the struggle the company is having in adapting to the current global IT environment. This slump seems to be part of a large-scale pattern that has affected International Business Machines throughout its history.’

Writing in the MITSloan Management Review, Harvard Business School professor D. Quinn Mills said this of IBM: “Cycles of decline and revitalization have been the company’s pattern through many decades.”

That was written in 1996. The pattern has  continued since then. IBM went through several cycles of decline and revitalization since that article was published. Most recently, IBM stock price peaked in the year after its new CEO took over — hitting near $215 in early 2013 — but it’s been a long, steady decline since then. The big question is whether IBM is poised to enter another period of revitalization. 

Cloud Computing and Red Hat

A big part of the reason why IBM’s revenue declined in Q3 was the continued weakness of the company’s legacy IT business. But under Rommety, IBM has been actively pursuing the cloud computing market. That effort has not paid off so far, with IBM capturing a mere 1.8% of the global cloud computing market in 2018, compared to 47.8% for Amazon’s (NASDAQ:AMZN) AWS cloud unit, and 15.5% for Microsoft’s (NASDAQ:MSFT) Azure cloud services.

However, IBM made a huge  move  this year by spending $34 billion to buy Red Hat, a leading provider of enterprise cloud software.

That move is allowing IBM to offer businesses a compelling “hybrid cloud” option. That approach appeals to companies that have not yet migrated their systems to the cloud, allowing them to keep components on their own premises but seamlessly spin portions of their data into the cloud.

Network World notes that despite the success of cloud providers like AWS, only 20% of enterprise computing has moved to the cloud — and that has been the “easy” 20%. The remainder is a mix of complex legacy systems, many running on mainframes. And that’s where IBM’s hybrid cloud approach, via Red Hat, has the potential to pay off in a big way. 

The Bottom Line on IBM Stock

At the moment, analysts are not particularly enthusiastic about IBM stock. Most have it rated as a “hold,” although six of the 21 polled by The Wall Street Journal have a “buy” rating on it.

However, based on its recent gains, IBM stock may be entering into a post-Q3 recovery. Also indicating that a recovery may be in the works is analysts’ average price target on IBM stock, which stands at $149.17.

IBM’s  acquisition of Red Hat and its resulting competitive advantage in the hybrid cloud market could lead to another cycle of revitalization for the company. If that turns out to be the case, several years from now the current IBM stock price of $135.44 may well seem like a steal. 

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

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