International Business Machines (NYSE:IBM) shares have been more or less in a holding pattern since mid October, unable to break out to $140. IBM stock had been on a modest upward trend so far in 2020, clawing up 1.98% as of last Friday. However, with Q4 results due next week, an analyst downgrade saw IBM slide in trading on Monday before recovering to close at $136.60 for a slight loss on the day. Given that the last big hit investors in IBM took was after the company missed on Q3 revenue estimates in October, it’s worth investigating whether we might be in for a repeat next week.
Evercore ISI analyst Amit Daryanani has been bullish on IBM for the past year. However, after 12 months of having IBM rated as a “buy,” on Monday, Daryanani changed course. He reduced his rating to “hold” and dropped his 12-month price target from $160 to $145.
Why the reduced optimism in IBM? Barron’s notes Daryanani is concerned that analyst revenue estimates for Q4 are too high, given the signs of slower than expected spending by enterprise IT departments.
It was a revenue miss that caused IBM shares to fall in mid-October, and the stock has yet to bounce back from that hit. In fact, while IBM stock dropped around 1% in value in 2019, it’s down a more concerning 10% since its 2019 highs as July wound down.
Soft Enterprise Technology Spending
The Next Platform lays out the challenges to not just IBM, but other enterprise technology providers, including Dell (NYSE:DELL), Cisco (NASDAQ:CSCO) and Hewlett Packard Enterprise (NYSE:HPE).
A volley of factors, ranging from worries about recession, to cyclical tech pricing, to geopolitical concerns has combined to reduce enterprise technology spending. The trade war between the U.S. and China has many companies on edge, as well as effectively shutting down the Chinese market for many American tech companies. Brexit is causing concern in Europe. Globally, there are worries that we’re overdue for the next big recession. In the face of this uncertainty, companies have been more reluctant to spend money building out their data centers.
Adding to the challenge, the prices for computer memory began to slide. With this key component at lower pricing, the overall price for servers fell. IBM still depends on hardware sales for a good chunk of its revenue, and the price pressure meant that was impacted. In Q3, the company reported its Systems Hardware revenue took a 14.7% hit.
All of these factors were already negatively impacting enterprise technology spending by Q2 2019. And none of those variables has improved significantly since then. There has been some progress on the trade war with China front of late, but trade relations between the U.S. and China remain far from normalized. If the situation continues to improve, that might boost confidence and increase enterprise IT spending. It might also allow IBM to sell more hardware in China. But that remains a very big “if” at this point, and not something that most analysts are counting on as part of their stock valuations.
Bottom Line for IBM Stock
Investment analysts continue to be cautious about IBM. Among those polled by The Wall Street Journal, there is a consensus “hold” rating for the stock. However, their average 12-month price target of $148.53 is a little higher than Evercore ISI’s downgrade. With IBM’s Q4 earnings approaching, InvestorPlace’s Nicolas Chahine notes the volatility around these reports, with the past four resulting in “two sharp rallies versus two sharp selloffs.” Which will it be this time? He points to the possibility that IBM could break out this quarter.
Long term, there is general optimism that IBM stock is going to see modest growth in 2020. However, going into Q4 earnings, the ride could get bumpy for short-term investors.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
