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Earnings

Will IBM’s share price soar following earnings?

So far this year, IBM’s [IBM] share price is down 7.01% to $125.93 at the close of trading on 16 October, and up 36.4% from its 52-week low of $92.31 to which it fell on 23 March. Prior to the market sell-off, IBM’s share price reached an intraday high of $158.75 on 6 February and was trading at its strongest level since the first half of 2018. IBM is infamous for being a legacy company. As it attempts to refresh its business by focusing more on its hybrid cloud strategy, what can investors expect of IBM’s share price following its third quarter 2020 earnings, due 19 October?

IBM’s share price enjoyed a mini rally in late January and early February — when it gained circa 16% in the space of two weeks – which was partly attributed to the replacement of then-CEO Ginni Rometty. 

Under her eight-year tenure, the company had seen its valuation decline by more than a fifth, according to The Motley Fool. Rometty’s departure led some analysts, including Logan Purk at Edward Jones, to upgrade the stock to a Buy rating. 

 

IBM’s share price performance

Since recovering from its March low, IBM’s share price has had a somewhat volatile past six months. The coronavirus pandemic has triggered uncertainty among some of the company’s corporate clients and this has led to a reduction in technology purchases. 

For Q2 2020, the three months to the end of June, the company posted revenue of $18.12bn, beating the $17.72bn expected by analysts, but down 5.4% year-over-year. Seven out of the last eight quarters have seen a negative change in revenue compared to the year-ago quarter. The only recent revenue gain was Q4 2019, when it was up a marginal 0.07%.

A criticism often levelled at IBM is that it is a legacy company focused on driving sales in areas that have limited growth potential, namely enterprise IT. Such a business model must limit IBM’s share price, as highlighted by Lisa Ellis, senior equity analyst at MoffettNathanson, in 2018. In a note to clients, Ellis wrote that IBM’s profits were in “likely irreversible structural decline”. 

Since then, the company — described by Ellis as a “100-plus year-old American icon” — has been attempting to move away from slowing segments in an effort to reinvigorate IBM’s share price.

The bright spot in the Q2 2020 earnings was its cloud business. Revenue for the segment in the second quarter was $6.3bn, accounting for 34.8% of total revenue and up 30% from Q2 2019. Revenue from open source software company Red Hat, which IBM acquired for $34bn last year, rose 17% year-over-year — the majority of cloud infrastructure is built on Linux and open source cloud software. 

On 8 October, it was announced that IBM would be spinning off its legacy IT infrastructure business to drive "hybrid cloud growth strategy” and help clients to realise their digital transformation ambitions, which have been accelerated by businesses adopting remote working. 

In early morning trading on 8 October, IBM’s share price was a little over 5.5% higher than the previous day’s close. 

 

What will IBM’s Q3 earnings look like?

According to MarketBeat, IBM provided guidance for the three months to the end of September on 8 October. It has forecast revenue to be $17.6bn, slightly higher than the $17.56bn projected by analysts. 

Both the company and analysts have forecast earnings per share to be $2.58. Full-year guidance was withdrawn back in April.

The spin-off won’t have a near-term impact on revenue, but IBM expects it to “unlock value” for clients and shareholders once the transaction has been completed, which will be by the end of 2021, according to Reuters.

MarketBeat data shows there are currently 16 Wall Street ratings for the stock. Six are Buys and 10 are Holds.

Disclaimer Past performance is not a reliable indicator of future results.

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