The Turnaround of IBM Stock Has Yet To Begin

Can International Business Machines Corp. (NYSE:IBM) stock move past the perception that it is an outdated technology name?

Photo of IBM (IBM) building as seen through the canopy of a tree. IBM logo is in large letters on side of building.


Despite multiple efforts to improve its image, including breaking the 110-year-old concern into separate publicly traded companies (an increasingly popular practice on Wall Street), IBM can’t seem to shake the view that it is an old economy stock.

Investors continue to shun Big Blue, as the company is known, in favor of newer, flashier social media and fintech stocks. This accounts for the fact that IBM stock has literally gone nowhere this year. Since January, IBM’s share price is little changed . Compare that to the year-to-date return of over 70% for Google’s parent company, Alphabet (NASDAQ:GOOGL).

All of this begs the question: What can IBM do to finally turn its fortunes around and get its stock moving again?

Try, Try Again

As mentioned, IBM’s latest (and biggest) effort to recast itself and light a fire under its share price is to split into two publicly traded companies, a move that IBM has said will enable it to focus on its quickly growing and profitable cloud computing business.

Specifically, IBM two weeks ago listed on the New York Stock Exchange its legacy IT infrastructure services unit, which provides technical support to more than 4,500 clients in 115 countries, as a separate company named Kyndryl (NYSE:KD). The IBM name and brand lives on with the company’s cloud computing and artificial intelligence business, which today accounts for more than half of its revenues.

The break-up comes with a $5 billion price tag, and it remains to be seen if the split will ultimately succeed. So far, KD stock has tumbled nearly 40% to $18.82 per share.

But IBM continues to hype the recent spin-off of Kyndryl, proclaiming that the latter company will be going after a $500 billion market opportunity focused on managing client-owned IT infrastructure, IBM also noted  that Kyndryl currently has a $60 billion contract backlog.

However the split is just the latest in a long line of restructuring efforts by IBM, whose share price has sunk 24% over the past five years. Past efforts aimed at restoring the company to its glory days have all failed.

Poor Financial Results

Despite repositioning itself as a cloud computing company, IBM continues to struggle under the weight of poor financial results. The company’s share price fell more than 8% on Oct. 21 after it reported yet another quarter that missed analysts’ average estimates.

IBM dragged the entire Dow Jones Industrial Average down with it after its latest earnings disappointment.  The company reported that its third-quarter revenue amounted to $17.62 billion versus the $17.77 billion that had been expected, on average, by Wall Street analysts. IBM’s Q3 net income declined 33% year-over-year as the company’s gross margin narrowed to 46.4% from 48% in Q2. The company declined to provide any forward guidance.

For IBM, it was another in a procession of subpar quarterly results. Perhaps most damaging from the Q3 report was data showing that the Cloud & Cognitive Software business produced revenue of $5.69 billion, up 2.5% from a year ago but less than the mean  $5.77 billion estimate of analysts. Given that cloud computing is supposed to be IBM’s future, the miss by that business unit was a blow to the company.

IBM has released several new processing chips in recent months, many of which have received positive reviews. But it remains to be seen the extent to which these new chips will improve the company’s bottom line.

Pass on IBM Stock

The leadership team at IBM is clearly working overtime to turn the company’s fortunes around and get its share price rising again. However, despite the company’s recent break-up and launch of Kyndryl, IBM continues to report poor financial results, and its main business units continue to underperform.

Until IBM manages to establish itself as a global leader in cloud computing and artificial intelligence, its stock is likely to continue struggling. Investors would be smart to pass on IBM stock for now. Revisit the company in a few months and see if its financials have improved at that point. Right now, IBM stock is not a buy.

 On the date of publication, Joel Baglole held a long position in GOOGL. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

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