International Business Machines Corp. (NYSE:IBM) is set to report its Q1 earnings results after the bell today, and investors are hoping that IBM stock ends its streak of disappointing results. Although in the last five IBM earnings reports the company has beat profit expectations, it has missed on revenue in the past six straight quarters and 11 of the last 12. However, if the latest IBM news manages to surprise investors, IBM stock could soar.
IBM is expected to report earnings per share (EPS) of $2.09, which would represent a decline of 28% from the previous year. Revenue is expected to come in at $18.26 billion, down 6.6% over the previous year. If that happens, that would mark the 16th straight quarter of year-over-year sales declines.
IBM stock is down about 11% over the last five years, as the company has struggled to keep its PC hardware relevant during a time when cloud computing and mobile are taking off. However, after years of not really having any direction, IBM is reinventing itself, which should propel future growth.
So what will investors be looking for in tonight’s IBM earnings report?
The company has been reducing efforts in its hardware business and is instead focusing on what they are referring to as strategic imperatives—cloud computing, big data analytics, security, and mobile computing. IBM is betting big in these areas to quickly establish itself as the leader, and it will be a key focus of investors.
In particular, IBM is hoping that its “Watson” artificial intelligence supercomputer will be the savior for the company. In 2014, IBM invested $1.0 billion to create a new business unit dedicated to Watson, which is able to analyze reams of data, learn from the results, and gain intelligent insights. The supercomputer processes information in a similar manner to how people think.
Katy Huberty, an analyst at Morgan Stanley, believes Watson is going to be a major driving force for IBM stock over the next few years. She recently reiterated an “Overweight” rating on IBM stock and increased her price target from $140.00 to $168.00. Having said that, Huberty believes that if the Watson business takes off, IBM stock could soar to $195.00 per share. (Source: “IBM’s Watson Is Significant, Says Morgan Stanley, Investors Just Have to Get It,” Barron’s, March 31, 2016.)
In 2015, the strategic imperatives business grew sales 26% from 2014 and it now accounts for about 35% of total revenue. (Source: “What to expect from IBM earnings,” MarketWatch, April 18, 2016.) In the January IBM earnings report, the company said that analytics sales grew more than 20% over the previous year, cloud services increased 60%, and mobile more than doubled. (Source: Ibid.)
Another area of focus for investors will be on the company’s software business. Revenue is expected to be down approximately 6.5% to $4.86 billion, but Stifel Nicolaus analyst David Grossman believes the segment could benefit from the company’s acquisition-spree. (Source: Ibid.) IBM made 11 acquisitions in the first quarter of 2015, which were primarily related to software and global services, so there might be a surprise here that investors will want to keep watch on.
The Bottom Line on IBM Stock
Going into the IBM earnings report tonight, investors can likely expect overall revenue to decline. But IBM is in transition and is showing significant opportunity in its strategic imperatives segment. If investors are patient, IBM stock could yield impressive gains in the next few years as the company reinvents itself.