Few companies have such a long and storied history as IBM (IBM), which set the course of computer technology for decades. Now, with the company continuing a long and massive restructuring and with a new chief executive at the helm, is IBM stock a buy?
Originally named International Business Machines, IBM helped pioneer multiple segments of the computer industry.
But IBM today is not the dominant force it once was. The rise of the internet and the explosion of new technology companies that emerged in the 1980s dramatically changed computer architectures. IBM’s giant mainframe computers, which could be the size of an elephant, became a metaphorical elephant.
The company was caught off-guard as customers shifted from centralized computing to a technology network that was highly distributed.
That caused IBM to begin a dramatic multiyear restructuring that accelerated in a big way on Oct. 10. IBM announced plans to spin off a $19 billion technology consulting business so it can focus more intently on cloud computing and artificial intelligence. IBM stock jumped 6% on the announcement, hitting a six-month high.
The business unit, called Managed Infrastructure Services, will be spun off into a new public company. It helps companies manage their technology infrastructure. IBM sees it as a tax-free deal completed by the end of next year.
The new company plans to focus on managing and modernizing client-owned infrastructures, a $500 billion market opportunity. It will provide hosting and network services, infrastructure modernization, and cloud migration services.
The multiyear transformation of IBM has focused on developing and expanding what IBM calls an open hybrid cloud platform.
“IBM is laser-focused on the $1 trillion hybrid cloud opportunity,” Chief Executive Arvind Krishna said in written remarks with the restructuring announcement.
A hybrid cloud architecture means IBM can provide its customers with both a public cloud and a private cloud, which gives a company extra network security. They share data and applications between them.
In the past 8 years, IBM has invested more than $120 billion in remaking the company. This includes $29 billion in capital expenditures, for things like scaling its cloud operations and artificial intelligence offerings and bolstering security and services capabilities.
The rising star at IBM is its Cloud and Cognitive Software business unit. It provides a variety of cloud computing services, data and transaction processing platforms. It also includes what IBM calls cognitive applications, which is another term for artificial intelligence.
It’s also where IBM’s $34 billion deal to acquire Red Hat was placed. Red Hat provides an open source, cloud software business. It was key in IBM’s massive expansion into offering a hybrid cloud architecture to its customers and should support IBM stock. IBM sees a massive opportunity ahead.
“We are redefining our future as a hybrid cloud platform and AI company,” Krishna said in the company’s third-quarter earnings conference call.
“For IBM, as we look forward, the case for hybrid cloud is clear,” he said. “Clients see 2.5 times more value in a hybrid cloud approach versus a public only. It’s a tremendous opportunity valued at $1 trillion, with most of the enterprise opportunity ahead of us.”
Krishna was previously senior vice president for the Cloud and Cognitive Software business. He officially took the reins as CEO in April, succeeding Ginni Rometty, who had led the company since 2012. At the time he became CEO, IBM stock jumped 5% on the news.
The major shifts in business operations help to explain why growth in revenue and earnings has been a struggle. In the past 20 quarters, only three of them showed a increase in revenue from the year-ago period.
IBM reported fourth-quarter results on Jan. 21 that fell short on revenue but beat on earnings. Adjusted earnings fell 56% to $2.07 a share, beating estimates of $1.81. Revenue dropped 6% to $20.37 billion, below estimates of $20.7 billion, according to FactSet
The company’s Cloud and Cognitive Software segment that includes Red Hat produced $6.84 billion in revenue. That was down about 5% and below Wall Street estimates of $7.18 billion. However, total cloud revenue of $7.5 billion grew 10%.
“We made progress in 2020 growing our hybrid cloud platform as the foundation for our client’s digital transformations while dealing with the broader uncertainty of the macro environment,” Chief Executive Arvind Krishna said in written remarks with the IBM earnings release. “The actions we are taking to focus on hybrid cloud and artificial intelligence will take hold, giving us confidence we can achieve revenue growth in 2021.”
For the current quarter, Wall Street expects IBM revenue to drop 1% to $17.4 billion, with adjusted earnings of $1.68, down 9%.
A technical analysis of IBM stock is a key component of determining whether the shares are worth buying.
The IBD Stock Checkup Tool shows that IBM has a weak IBD Composite Rating of 13 out of a best-possible 99. The rating means IBM stock currently outperforms just 13% of all stocks in terms of the most important fundamental and technical stock-picking criteria. The best stocks will often rate 98 or 99 at the time they launch a big price run.
Along with its low Composite Rating, the stock also has a weak Relative Strength Rating of 6. The rating shows a stock’s price movement over the last 52 weeks against that of other stocks. Look for stocks with a rating of 80 or higher. The best stocks will often rate over 90 at the time they launch a big price run.
Another discouraging sign for IBM stock is its relative strength line. It tracks a stock’s performance vs. the S&P 500 index. Typically, the RS line of the strongest stocks is either confirming or leading a stock’s price into new high ground. IBM’s relative strength line has been trending lower since 2011, meaning it has underperformed the benchmark index for ten years. Investors would be better off putting their money in the S&P 500 until IBM stock can deliver consistent outperformance.
IBM stock is currently not a buy.
IBM stock had previously formed a first-stage cup with handle, with a 135.98 buy point. It came close to that in mid-October then retreated and fell below both the 200-day moving average and the 50-day line, both negative indicators.
And be sure to read IBD’s after-the-close The Big Picture column each day to make sure growth investors have a green light.
Please follow Brian Deagon on Twitter at @IBD_BDeagon for more on tech stocks, analysis and financial markets.
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