Source: PaxForex Premium Analytics Portal, Fundamental Insight
April was pretty challenging for the stock market as a whole, but International Business Machines succeeded in reversing the momentum. While the S&P 500 fell 8.8% for the month, a robust earnings report drove IBM stock up 1.7%, as per S&P Global Market Intelligence.
With IBM's managed infrastructure services business no longer pulling it down, strong demand for software and consulting contributed to the century-old tech titan beating analysts' forecasts for both revenue and earnings.
Late last year, IBM spun off its managed infrastructure services business, called Kyndryl, getting rid of about $19 billion in slow-growing revenues. Now the company can focus on better long-term growth opportunities, which include hybrid cloud computing and artificial intelligence.
IBM can capitalize on the growth of hybrid cloud computing in several ways. The company's hybrid cloud platform, built on Red Hat technology, can run on top of popular public clouds such as AWS, local enterprise infrastructure, and its own mainframes and Power servers. The platform is complemented by IBM's portfolio of software products for data analytics, artificial intelligence, automation, transaction processing, security, and other mission-critical applications.
IBM's software segment revenues totaled $5.8 billion in Q1, up 15 percent on a currency-adjusted basis. More than 4,000 customers use the company's hybrid cloud platform, and Red Hat products grew 21% during the quarter. Some of that increase was boosted by Kyndryl sales, but demand was strong regardless.
In addition to software, IBM provides consulting services to large enterprises paving the way for the cloud. Consulting services totaled $4.8 billion for IBM in the first quarter, and sales were up 17% year over year. The growth was driven by a combination of strong demand for hybrid cloud and partnerships with other technology companies, including SAP and Adobe.
Good results in the software and consulting segments led to total revenue for the quarter of $14.2 billion, $360 million above analysts' average forecast. Adjusted earnings per share of $1.40 beat forecasts by one cent.
IBM anticipates 2022 to be a year of growth. Earnings should grow by a mid-single-digit percentage on a currency-adjusted basis, with an additional 3.5 percentage point increase from Kyndryl sales. Free cash flow is expected to be $10 billion to $10.5 billion.
One reason for IBM's strong stock performance in April may be valuation. IBM is valued at about $120 billion, which is about 12 times the free cash flow forecast. Apparently, the market doesn't yet believe in the company's growth story. If IBM can deliver sustained and consistent growth in its more compact and focused form, outperformance could be commonplace for falling stocks.
As long as the price is above 131.80, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 137.42
- Take Profit 1: 141.00
- Take Profit 2: 145.00
Alternative scenario:
If the level of 131.80 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 131.80
- Take Profit 1: 127.50
- Take Profit 2: 125.00
