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Strong earnings and a potential new US government contract could power up the IBM share price

IBM — strictly, International Business Machines Corporation — [IBM]  has had a reasonable 2021 so far, with the IBM share price gaining 11.6% in the year to close 15 July at $140.45. It looked like the stock was in trouble when the IBM share price fell 9.9% in a day on 22 January, closing the day at $118.61. Following that, the IBM share price languished throughout February before beginning to gather pace during early March.

A run through the month saw the IBM share price close 26 March at 136.38, just short of 15% above the 22 January bottom, and a surge through April led the stock to close the first trading day in May at $144.75.

Since then, the IBM share price went to post its highest close in the past 12 months at $151.28 on 11 June. However, the stock has fallen 7.2% in the sessions since, leaving the IBM share price 14.2% above its level 12 months ago.

11.6%

IBM's YTD share price rise

  

With the tech giant expected to announce first quarter 2021 earnings after markets close on 19 July, what can investors expect from the IBM share price?

 

Ahead of expectations

Zacks Investment Research expects IBM to post total revenues of $18.24bn, which would represent a 0.7% year-on-year increase. If this is accurate,  sales will have risen 2.9% since the past quarter.

Zacks also estimates earnings per share (EPS) of $2.25, up 3.2%on the equivalent quarter a year ago. It would also see a big lift on the previous quarter’s earnings, with the Zacks estimate being 27.1% above the last reported EPS of $1.77.

IBM has a track record of beating expectations, with each of the last 26 quarterly EPS figures reported having beaten analyst expectations. In January, IBM’s reported $2.07 for the quarter to December 2020 came in 16.3% above analyst expectations. Should the upcoming report contain a similar surprise, it would have a very positive impact on the IBM share price.

The expected sales figure for this quarter is some way short of the $20.38bn reported two quarters ago, and a huge surprise would be needed to beat that total. The fourth quarter of the calendar year is typically IBM’s largest, however, so few will be disappointed should this quarter’s revenue fail to match this level and it would be unlikely to impact the IBM share price negatively if so.

IBM has been attempting to expand its cloud offering over the past year, having recently acquired Madrid-based Bluetab Solutions Group and DevOps consultancy BoxBoat Technologies.

“Our clients require a cloud architecture that allows them to operate across a traditional IT environment, private cloud and public clouds. That’s at the heart of our hybrid cloud approach” - John Granger, senior VP, hybrid cloud services at IBM

 

John Granger, senior VP, hybrid cloud services at IBM, said of the BoxBoat deal: “Our clients require a cloud architecture that allows them to operate across a traditional IT environment, private cloud and public clouds. That’s at the heart of our hybrid cloud approach.” He added that containerisation, via services in which BoxBoat specialises such as Kubernetes, is integral to IBM’s hybrid cloud offering.

IBM will hope that expanding its cloud offering will stand it in a strong position to compete for the US Department of Defense’s lucrative new Warfighter Cloud Capability contract, which currently seems to be Amazon [AMZN] and Microsoft’s [MSFT] for the taking. However, John Sherman, Pentagon chief information officer, has said that other providers, such as Google [GOOGL], Oracle [ORCL] or IBM could qualify for parts of the deal.

 

Cloud growth

The cloud computing space saw rapid growth during 2020, especially given the lockdown economy that emerged out of the coronavirus pandemic, but this growth has slowed in 2021. In the 12 months to 15 July, the First Trust Cloud Computing ETF [SKYY] gained 37.8%, but in the year to date has grown only 8.6%. As of 15 July, IBM is the 16th-largest holding in the ETF with 2.27% of the fund’s weight.

The fund has lagged behind the Nasdaq during this year, with the tech-heavy index having grown 12.8%. IBM is the smallest holding in the Global X Cloud Computing ETF [CLOU] as of 15 July, with a weighting of just 0.26%. The ETF’s performance in the year to date is worse than that of the First Trust Cloud Computing ETF, with losses of 0.36% in the year to 15 July.

Over the previous 12 months, the Global X Cloud Computing ETF has lagged both the First Trust Cloud Computing ETF and the Nasdaq, which has gained 26.8%.

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