International Business Machines Corporation (IBM), better known as IBM, is set to report first quarter fiscal 2021 earnings results after the closing bell Monday. Investors continue to wonder when the real turnaround for IBM will begin.
Lackluster revenue expansion and weak EPS growth have plagued the company in recent years, but the turnaround could be underway. The stock has rallied from about $115 back in January to close to $140. Now sitting near $132, the stock is facing some key resistance. The market is now, understandably, taking a wait-and-see attitude with Monday’s earnings results. The company’s cloud ambitions have promised to return value to shareholders, but IBM still hasn’t shown enough revenue strength to support a higher multiple, despite the $34 billion Red Hat acquisition which was believed would modernize the cloud business.
What’s more, IBM has not benefited in the massive economic expansion that saw cloud leaders such as Amazon (AMZN) and Microsoft (MSFT) produce double-digit revenue gains. Does IBM still have room to catch up? The cloud market is still projected to grow by double-digit percentages in the next five years. Investors will want to know how much of that market can IBM acquire. The market on Monday will want to hear IBM management not only speak more confidently about its efforts to emerge more competitively in the cloud market, but demonstrate its ability to do so. In other words, show, not just tell.
For the three-month period that ended March, Wall Street expects the New York-based company to earn $1.63 per share on revenue of $17.36 billion. This compares to the year-ago quarter when earning were $1.84 per share on $17.57 billion in revenue. For the full year, ending in December, earnings are projected to rise 26.7% year over year to $10.99 per share, while revenue of $74.09 billion would rise about 1% year over year.
Aside from the reported numbers, the market will also focus on the company’s recent announcement to spin off of its managed information services business which is has named Kyndryl. In an effort to emphasize more of its cloud offerings, the company in late 2020 disclosed plans to further slim down its legacy businesses. This is the company’s latest effort to transform itself for the new age and it has struggled to generate sales growth in its software and services businesses. While there are still plenty of doubters, Evercore ISI analyst Amit Daryanani is looking on the bright side.
In a recent note to investors, Daryanani suggests while the longer focus will remain on the upcoming Kyndryl spinoff and ability to drive mid single-digit growth consistently post spin, he also thinks IBM “should see benefits from an incrementally more positive IT spending background.” Daryanani has the equivalent of a Hold rating and $140 target on IBM stock. Adding, “We think the stock has strong support at current levels given a 5% dividend yield."
All of that said, the company’s ability to pivot towards the cloud is the main factor that will drive the stock over the next year. Anything short of that will be a disappointment, despite how attractive the yield might be. To that end, the market is correct to turn its attention on the soon-to-be “skinnier” version of IBM after the spinoff. And if the company can boost revenue in the double-digit range by the end of 2022, IBM stock may finally recapture the $200 mark.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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