IBM Stock Could Move Heavily on Forward Guidance
International Business Machines Corp. (NYSE:IBM) reports its second-quarter earnings after the closing bell today. Since IBM stock has surged 10.94% in the last three months, the markets are clearly anticipating either strong earnings or solid guidance.
IBM is expected to report an earnings drop of 24.74%, a decline from $3.84 per share to $2.89 per share. Revenue is also forecasted to have fallen, but at a much more modest pace, from $20.08 billion to $20.03 billion. It’s the 17th straight quarterly decline for IBM. (Source: “What to expect when IBM reports earnings,” MarketWatch, July 15, 2016.)
The firm’s core business has been shaky since cloud computing began to threaten its legacy IT businesses. With so many options available for online software solutions, clients became unwilling to shell out massive amounts of money for physical hardware.
“Big Blue,” a nickname given to IBM, was in trouble, but the firm didn’t simply lie down on the train tracks, waiting to be run over. Instead, it pushed into artificial intelligence (AI) software and formed its own cloud computing play called “Watson.” The platform has experienced 300% year-over-year growth.
The company has also been on a spending spree, buying out 25 companies in just 18 months. According to IBM’s chief executive officer, these acquisitions are “strategic imperatives” meant to bolster the firm’s cloud analytics, security, and mobile tech. (Source: “What Wall Street will be looking for in IBM’s earnings,” CNBC, July 15, 2016.)
Many analysts, including myself, think IBM stock is approaching a tipping point.
The firm’s revenues from cloud-based offerings are almost sizeable enough to offset the weakening demand for its legacy products. Once that line is crossed, IBM stock will be changed forever. It will cease to be a dusty old IT company.
What’s clear is that investors are salivating over this impending turning point in IBM’s business. Why else would IBM stock have appreciated 31.28% over the last six months?
The expectations are baked into the IBM’s share price, but there could be room for further gains if the earnings report contains strong forward guidance. Britain’s recent departure from the European Union caused many to downgrade their forecasts for new IT spending, but we have yet to see what the real impact will be.