IBM stock gains after earnings beat but the ‘really important stuff’ could be doing better, analyst says

IBM stock gains after earnings beat but the ‘really important stuff’ could be doing better, analyst says

International Business Machines Corp. shares ticked higher Tuesday after the company topped June-quarter expectations, but analysts weren’t giving the company too much credit for clearing a low bar.

Mused MoffettNathanson analyst Lisa Ellis: “We’re still working on getting the semantics right: when companies beat previously-slashed estimates, is that ‘better than’ expectations? Or ‘less bad than’? Or ‘not as bad as’?”

She wrote that open source software developer Red Hat saw “solid” growth in the quarter but lamented that other high-margin areas of the business didn’t perform as well.



IBM IBM, +0.57% shares touched an intraday high of $132.17 Tuesday and were last up 0.7% at $127.26. In comparison, the Dow Jones Industrial Average DJIA, +1.00%, which includes IBM as a component, was up 1.2%, the S&P 500 index was up 0.5%, and the tech-heavy Nasdaq Composite Index was down 0.5%.

IBM’s cloud and cognitive software division contributes about a third of revenue but two thirds of pretax income, Ellis said. This division includes Red Hat, broader cloud software, and digital software solutions, but outside of Red Hat, she wasn’t too enthused by the results as cognitive applications declined 8% from a year earlier, while cloud and data platforms excluding Red Hat fell about 10%.

“Although some pandemic-driven weakness in revenues is expected, these results don’t bode well for the outlook for IBM’s profits and Cloud + Digital/AI strategy,” wrote Ellis, who maintained a sell rating and $115 price target in a note titled: “Shaking off the Pandemic Nicely, But Kinda Wish The Really Profitable, Really Important Stuff was Doing a Bit Better.”

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Morgan Stanley analyst Katy Huberty, who has an equal-weight rating and a $128 price target, said the quarter was “better than feared” but expects a slow recovery in the second half of the year.

“While IBM saw some improvement in demand trends in software and [global business services] at the end of the June quarter, the business still didn’t grow Y/Y in June and the lack of visibility around the virus case curve translated to another quarter of no full-year guidance,” Huberty said.

Back in April, IBM pulled its full-year earnings guidance of “at least $13.35” a share, and said on Monday it was still withholding it because of the economic uncertainty created by the COVID-19 pandemic.

Analysts surveyed by FactSet expect full-year earnings on average of $10.97 a share, down from the $11.06 a share expected before the earnings report.

Wedbush analyst Moshe Katri put “beat” in quotes while talking about IBM’s latest quarter, writing that the company’s results came in better than anticipated but that IBM still saw a 20% year-over-year drop in bookings and a quarterly deceleration in Red Hat growth.

“In our view, a potential acceleration/expansion in IBM’s digital-based revenue base (accounting for a larger portion of annual run rate) could provide a significant catalyst for IBM’s re-rating,” he wrote. “At this point, we don’t believe IBM has reached this inflection point.”

Katri has a neutral rating and $140 price target on the shares.

Even Stifel’s David Grossman, an IBM bull, said the results were “in line” and noted that the stock’s after-hours climb of 3% to 4% on Monday “may [have] reflect[ed] the higher than usual short position and relatively low expectations” for the quarter.

“Cadence of demand generally improved month-month over the course of the quarter, but June was still relatively weak and visibility remains low (40% of revenues transactional/volume based),” he wrote, while maintaining a buy rating and $147 target price.

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Citi Research analyst Jim Suva was impressed with IBM’s “good, clean results that did not include large abnormal tax benefits, IP boosts or one-time gains,” though he still found reason for caution.

“Our reservation is that IBM’s signings are down -14% off easy comps and a backlog that is down -1%, coupled with continued negative sales growth in many company segments outside of cloud and acquired Red Hat,” Suva wrote. He kept his neutral rating on the stock but upped his price target to $140 from $120.

At least seven analysts increased their price targets on IBM shares after the report, according to FactSet. Of the 18 analysts tracked by FactSet who cover IBM’s stock, three have buy ratings, 13 have hold ratings, and two have sell ratings, with an average price target of $132.27.

IBM shares have gained 9% over the past three months as the Dow has increased 17%.


Originally published on MarketWatch

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