Forget the Company’s Weak Earnings; Here’s Why I’m Bullish on IBM Stock
Shares of International Business Machines Corporation (NYSE:IBM) tanked following the company’s third-quarter results. But one development, buried deep in the company’s press release, promises to be a big catalyst for IBM stock.
It was a disappointing quarter for IBM stockholders. As revenues at the U.S. computer giant continue to drop in the third quarter, investors’ concerns continue to rise, sounding their portfolio alarm bells. The third quarter was also the 13th negative quarter for International Business Machines. If at all possible, IBM stock managed to perform even worse than analysts’ expectations. Following the announcement, IBM stock plunged more than six percent.
The earnings for the second quarter of 2015 were 17% lower than the comparable quarter of 2014, coming in at $3.45 billion against $4.14 billion. There was some good news in that this figure, which in profit per share terms was $3.84 rather than the expected $3.78, is still down from previous quarters but not entirely devoid of optimism.
IBM Earnings Report Points to Global Sales Challenges: Markets Worry About IBM Stock
IBM third-quarter revenue was 13% lower than in the last quarter of the year at $20.8 billion, which is just under analysts’ estimates of $21.0 billion. The global technology sector saw $8.1 billion in revenue, growing 10%. But the software sector lost 10% with sales of $5.83 billion, while the consulting service business lost 12%. (Source: Julie Bort, “IBM reports Q3 2015 earnings, cuts forecasts,” Business Insider, May 19, 2015.)
The losses were especially noted in the global markets, starting at 19% lower overall. In Europe, Africa and the Middle East, revenues fell by eight percent. In such countries as India, Brazil, Russia, and China, sales fell by as much as 35%.
Although gross margins have grown by 0.8% (from 49.1% to 49.9%), the markets show concern with IBM stock has lost four percent after the earnings announcement. So far, IBM shares have dropped nine percent in 2015.
The prolonged revenue contraction does not bode well. However, IBM has developed a new supercomputer that brings it back into the hardware game with a breakthrough machine. The supercomputer is one of the reasons shareholders should hold on to IBM stock.
The new computer, a veritable “brain,” will consume massive amounts of medical data in seconds that would take medical specialists weeks to examine, vastly accelerating the diagnosis and related treatment planning to address each patient’s unique case.
The supercomputer, named Watson, will be used to make cancer treatment decisions in 14 hospitals throughout the United States and Canada. The system will help evaluate individual cancers and suggest which drugs should be used to strike them.
IBM’s Supercomputer Could Revolutionize Cancer Research
“When you’re dealing with cancer, it’s always a race,” said Lukas Wartman at Washington University in St. Louis. “As a cancer patient myself, I know how important it is to assess the best information that we receive from genomics. Unfortunately, for the data to translate into potential treatment options often requires weeks, whereby a whole team of experts should focus on studying a single patient.” (Source: “IBM’s Watson supercomputer to speed up cancer care,” BBC, May 6, 2015.) Watson helps to drastically reduce the time needed to develop the approach as required by each patient.
Through Watson, IBM has brought technology and the power of cognitive computing to address one of the most urgent and pressing issues of our time: the fight against cancer. It will push medical science toward new frontiers—and quickly. The first three Watson computers will be tested at the Cleveland Clinic, the Fred and Pamela Buffett Cancer Center in Omaha, and the Yale Cancer Center. (Source: “IBM’s Watson Enters Market for Analyzing Cancer Genetics,” Forbes, May 6, 2015.)
IBM’s supercomputer will be adopted in 11 other facilities by the end of 2015 as part of the $20.0 million Modernizing Medicine program, a specialized cloud-based medical solution program to help specialists create and use medical information in new ways. IBM spent $100 million in developing Watson.
The days when IBM dominated the technology sector are hard to remember. The new generation of tech sector millionaires, including Facebook founder Mark Zuckerberg, was not even born when IBM started to lose market share to nimbler hardware manufacturers.
Big Blue has suffered consecutive bad quarters also because of the strong U.S. dollar and sluggish activity in China, where sales fell 17% in the third quarter. Management now expects annual adjusted EPS of between $14.75 and $15.75 against $15.75 to $16.50 and $15.68 earlier consensus for the year. (Source: Business Insider, May 19, 2015.)
IBM is indeed still dependent on large contracts for software, which take time to secure. It then needs to invest in new activities that show promising signs. The Watson supercomputer seems like a step in the right direction.