Meta (META), IBM (IBM) Earnings Reactions Provide Opportunity for Investors
Two big tech stocks, IBM (IBM), and Meta (META), are significantly lower in this morning’s premarket trading: IBM is trading at around 8.5% below yesterday’s close as I write, with META doing even worse, down close to 15%. In each case, the drop is in reaction to earnings. Meta actually beat expectations on both the top and bottom lines, while IBM beat in terms of profits but on slightly lower than expected revenue for the quarter.
Clearly, it is not the results that are moving the needle. No, both stocks are down because of announcements that accompanied those earnings, and in both cases, the short-term, knee-jerk reaction by traders creates a long-term opportunity for investors.
One of the frequent criticisms of Wall Street or financial markets around the world is that they are too short-term in their outlook. Having worked in dealing rooms around the world for twenty years or so, I fully understand why that is the case. As a trader, broker, or whatever, your performance is judged day to day, with decisions about your bonus -- and even whether or not you keep your job -- are made on a quarterly basis. There is no point in you looking more than three months ahead because you may not be at your desk in four.
As I said, I get it, but that doesn’t make some of the short-term moves any less absurd, particularly when a stock is hit because a company is investing in the future. To some extent, that is exactly what is happening with both IBM and META.
I suppose you could say that IBM’s miss on revenue is partly to blame for its fall, but being as small a miss as it is and accompanied by a bottom line beat, there must be something other than just the earnings numbers prompting the selling. That something else seems to be the accompanying announcement that IBM is buying the cloud computing company HashiCorp (HCP). There had been rumors that a deal was coming, and Bloomberg even accurately reported on the proposed buyout price earlier in the day, but confirmation by IBM sent their stock into a tailspin.
When a company buys another for more than its current share price, the market almost inevitably views it as a bad deal. After all, the market has already said what it thinks the company is worth in setting that prevailing share price, so any premium to that is seen as overpaying. But that is, by definition, a short-sighted view of any deal. It is based on the immediate perceived value of the company being bought and frequently doesn’t give enough weight to synergies after a merger or future growth.
This is not the first time IBM has been in this situation, either. Back in 2018, they announced that they were buying Red Hat and the market reacted badly to that deal, too. However, Red Hat has contributed significantly to results since. In this case, as it was back then, IBM is actually responding to criticism of their lack of involvement in the cloud space, which adds another level of irony to their being punished for doing so. Of course, this may not turn out to be a great deal, but history suggests it won’t be a bad one either, certainly not bad enough to justify a big drop in the stock.
The same kind of irony also surrounds the drop in META this morning. Again, there is a logical reason for some of the fall. Meta gave disappointing forward guidance, which will have prompted some selling, but a lot of the pessimism seems to be because they also announced that they would be investing heavily in AI this year, something that analysts and talking heads have been saying they should do.
It is increasingly clear that AI is not just a fad but a truly revolutionary technology that will fundamentally change the economy, so what is Meta supposed to do? Sitting back and watching while others dominate is really not an option. The investment will hurt overall margins in the short-term, but punishing the stock because the company is responding to a fundamental change in the world and investing in securing their future makes little sense from a long-term perspective.
In both cases, this is Wall Street at its most short-sighted and frustrating. IBM and META are falling based on the impact of the companies’ actions on the next quarter’s profits, but the long-term benefits of their investments are being discounted. That doesn’t mean that either stock will bounce back immediately, but it does mean that over time, these investments will probably benefit the companies. That makes the stocks look like good value buys on the drops rather than things to be wary of.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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