International Business Machines Corporation (IBM), one of the largest technology and consulting companies in the world, reported better than feared earnings results in the second quarter and signalled that several quarters of sustained higher cloud computing business growth could help build credibility and confidence in a more sustained revenue growth story amid their digital shift due to the COVID-19 pandemic.
IBM’s total revenue declined 5.4% to $18.12 billion but was above Wall Street’s forecast of $17.72 billion. Excluding the impact from currency and business divestitures, revenue fell 1.9%. However, revenue from the cloud business jumped 30% to $6.3 billion during the quarter.
Excluding items, the company earned $2.18 per share, above estimates of $2.07. The company reported a total cloud revenue of $23.5 billion over the last 12 months, up 20%. Net cash from operating activities was $15.1 billion and free cash flow was $11.5 billion over the last 12 months.
“Our clients see the value of IBM’s hybrid cloud platform, based on open technologies, at a time of unprecedented business disruption,” Arvind Krishna, IBM chief executive officer said in a press release.
“We are committed to building, with a growing ecosystem of partners, an enduring hybrid cloud platform that will serve as a powerful catalyst for innovation for our clients and the world.”
“Our prudent financial management in these turbulent times enabled us to expand our gross profit margin, generate strong free cash flow and improve our liquidity position,” James Kavanaugh, IBM senior vice president and chief financial officer said in a press release.
“We have the financial flexibility to continue to invest in our business and return value to our shareholders through our dividend policy.”
IBM stock forecast
Eight analysts forecast the average price in 12 months at $135.43 with a high forecast of $150.00 and a low forecast of $111.00. The average price target represents a 7.17% increase from the last price of $126.37. From those eight, four analysts rated ‘Buy’, four rated ‘Hold’ and none rated ‘Sell’, according to Tipranks.
Morgan Stanley target price is $128 with a high of $161 under a bull scenario and $75 under the worst-case scenario. IBM had its price objective boosted by equities researchers at Evercore ISI to $137 from $130; Independent research lower the price target to $135.00 from $160.00.
Other equity analysts also recently updated their stock outlook. IBM had its target price dropped by research analysts at UBS Group from $140 to $120. The brokerage presently has a “neutral” rating on the technology company’s stock. Wedbush dropped their target price on shares of IBM from $155.00 to $140.00 and set a “neutral” rating on the stock. Credit Suisse Group set a $150.00 price objective on shares of IBM and gave the stock a “buy” rating.
We second UBS Group and Wedbush on IBM stock outlook. We also think it is good to hold for now as 50-day Moving Average and 100-200-day MACD Oscillator signals bearishness.
“IBM reported better than feared results though uncertain virus case curve limits a return to full-year guidance. Cloud was a bright spot, with pro forma growth of 20%, up 10 points from 1Q20. After netting out several cross currents, our 2H20 estimates are largely unchanged,” said Katy Huberty equity analyst at Morgan Stanley.
“Cautious results from our recent AlphaWise CIO surveys that point to Services and AI most at risk of spending cuts, along with our 4Q19 survey highlighting the risk of IBM share loss in Software and Services reduces our confidence to sustainably grow revenue. Although greater recurring revenue (~60%) drives less downside risk to the top line relative to the rest of our coverage group in a COVID-recession, lack of conviction around IBM’s ability to stabilize revenue in the medium to long-term keeps us Equal-weight.”
Upside and Downside risks
Short-lived recession followed by pent up demand; Material divestiture to accelerate the pivot to growth; IT spend upside, especially Cloud and Cognitive, tied to Data Era projects and Faster execution & upside on RHT synergies, Morgan Stanley highlighted as upside risks to IBM.
Slowing GDP and IT spend drive sustained revenue declines; Failure to monetize investments; SaaS growth stalls as management focuses on margins and Accelerated cloud cannibalization in core markets, Morgan Stanley highlighted as downside risks.