IBM Remains Weak Despite Beating Q4 Estimates

Trump's signed tax bill - photo - January 2018International Business Machines Corporation (NYSE: IBM) reported a 4% increase in the fiscal 2017 fourth quarter revenue, compared with the similar period last year. It is the first revenue growth recorded by the company in 23 quarters. Still, the stock lost about 4% to close at $162.37 on Friday. There were two main reasons for the decline in the stock price. Firstly, the revenue from ‘strategic imperatives’, which includes cloud, security, mobility, and analytics business, were barely in line with analysts’ estimates. The market had expected IBM to beat estimates. Secondly, the gross margin of 49.5% was below analysts’ expectations of 50.9%. We anticipate the downtrend to continue due to the facts presented underneath.

The New York-based company reported fiscal 2017 fourth-quarter revenues of $22.543 billion, an increase from $21.770 billion in the similar period last year.

During the quarter ended December 31, 2017, IBM recorded a net loss of $1.054 billion or $1.14 per share, compared to a net profit of $4.501 billion, or $4.72 per share in the year-ago period.

IBM took a one-time charge of $5.50 billion due to the new tax law passed in December. That resulted in a GAAP net loss for the quarter. Excluding charges, the non-GAAP earnings were $4.81 billion or $5.18 per share in 4Q17.

The Wall Street analysts had expected IBM to post earnings of $5.17 per share on revenues of $22.06 billion. Cognitive solutions reported a 2.5% y-o-y increase in revenues to $5.432 billion. Global Business Services posted revenues of $4.152 billion, up $31 million from last year. Technology Services & Cloud Platforms’ revenue declined marginally to $9.198 billion. Systems revenue surged to $3.33 billion, from $2.53 billion in the prior-year period.

As it can be understood, an increase in the Systems revenue contributed to the overall increase in the revenue. Big ticket purchases from banks, healthcare companies, and other financial institutions may continue over the upcoming quarters. However, analysts are concerned that the revenue growth may turn out to be flat in the second half of year, once the server refresh cycle ends. Therefore, the market expects IBM to report gains in its software and services business as that will enable the company to grow even after the spike created by hardware sales fades.

The Bloomberg Intelligence analyst Anurag Rana has said “It’s possible that organic growth may be back to flat in the second half of this year, once the benefit from the mainframe refresh cycle goes away. If you exclude the contribution from mainframes, growth would be flat to negative, which is in line with the past few quarters.”

The company also expects an increase in tax rate in 2018, as a result of the tax bill. IBM has pointed out that a lower corporate tax rate is offset by a broader tax base and a reduced foreign tax credit utilization. Therefore, concerns over the lack of growth in the software business is expected to keep the stock weak in the short-term.

Technically, as the image below indicates, the stock has broken the support level of 164. The next major support exists only at 155. The stochastic indicator is also declining towards the bearish zone. Thus, we can expect the stock to remain bearish in the short-term.

IBM - Technical Analysis - 22nd January 2018

To gain from the downtrend, we may purchase a put option offered by a reputed binary broker. Before parking our surplus money in the option contract, we would like to make sure that the stock is trading near $163. Further, the put option should remain active until the end of January.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.