Source: PaxForex Premium Analytics Portal, Fundamental Insight
IBM's stock experienced a notable 9% surge to an 11-year peak on January 25, following the release of its fourth-quarter earnings report. The company demonstrated impressive growth, with a 4% year-over-year increase in revenue, totaling $17.4 billion - $100 million more than analysts had predicted. Additionally, adjusted earnings rose by 8% to $3.87 per share, surpassing the consensus forecast by $0.07 per share.
This positive earnings outcome signals potential success in IBM's turnaround initiatives under the leadership of CEO Arvind Krishna, who assumed the role in April 2020. The question remains whether IBM can undergo a complete reinvention, akin to Microsoft's transformation into a high-growth tech giant over the past decade, fueled by its expansion into the cloud-based ecosystem.
Over the preceding decade (2010-2020), IBM faced a substantial decline in annual revenue - from $99.9 billion to $55.2 billion. Two primary errors contributed to this persistent decline. Firstly, IBM's core business divisions, including software, IT infrastructure, and mainframes, struggled as businesses increasingly adopted cloud-based services. Secondly, the company divested many lower-margin segments, leading to a reduction in overall revenue.
While streamlining its extensive business initially seemed prudent, IBM's focus on share buybacks, rather than strategic investments in its own cloud ecosystem, proved to be a misstep. By the time the company shifted its attention to the cloud, it had already relinquished its position in the public cloud platform market to Amazon, Microsoft, and Alphabet's Google.
These strategic misjudgments prompted numerous investors, including Warren Buffett, to divest from IBM. Over the decade from 2010 to 2020, IBM's stock declined by 4%, while the S&P 500 advanced by 237%. Even factoring in reinvested dividends, IBM delivered only a total return of 38%, significantly lagging behind the S&P 500's total return of 322%. Arvind Krishna and Microsoft's Satya Nadella shared a common background of leading their respective companies' cloud divisions before assuming their roles as CEOs. Consequently, it was unsurprising when Krishna, following in Nadella's footsteps, swiftly prioritized the expansion of IBM's cloud business.
Krishna's initial strategic move involved divesting the slower-growth managed infrastructure services unit, leading to the spin-off of Kyndryl in November 2021. This decision allowed IBM to concentrate on bolstering its higher-growth hybrid cloud and artificial intelligence (AI) businesses.
Recognizing the challenge of competing directly with Amazon, Microsoft, and Google in the public cloud arena, Krishna shifted focus towards developing hybrid cloud services. These services would effectively process data flowing between private and public clouds, with the linchpin of this strategy being IBM's Red Hat subsidiary, renowned for developing open-source software across diverse computing platforms. The expansion of this hybrid cloud initiative also aligns with IBM's ambitions to enhance its AI tools for comprehensive data processing.
By the end of 2021, IBM restructured its business into three simplified reporting segments: software, consulting, and infrastructure. Setting a goal of achieving "sustainable mid-single digit revenue growth" from 2022 to 2024, the company anticipated the mid-single-digit growth of its software business and the high-single-digit expansion of its consulting segment to offset the expected "flat" growth in its infrastructure division.
While IBM surpassed its targets in 2022, the slower-than-expected expansion of its consulting and infrastructure divisions impacted its growth trajectory throughout 2023. However, the majority of this deceleration occurred in the first half of the year, and growth reaccelerated in the second half as both consulting and infrastructure businesses rebounded.
Looking ahead to 2024, IBM anticipates mid-single-digit revenue growth on a constant currency basis, with currency headwinds slightly reducing reported revenue by one percentage point - consistent with analysts' expectations for 3% growth.
Despite IBM's improving prospects, its stock remains attractively priced at 19 times forward earnings, offering a substantial forward yield of 3.8%. In comparison, Microsoft, trading at 37 times forward earnings with a modest forward yield of 0.7%, is growing significantly faster. Analysts project a 15% increase in Microsoft's revenue and earnings this year as it expands its cloud and AI businesses.
While IBM shows promise, dubbing it the next Microsoft may be premature. Green shoots are emerging, but IBM is still in the process of establishing a defensible niche with its latest cloud and AI services. Microsoft, on the other hand, maintains a clear leadership position in both markets. IBM may stabilize its aging business with single-digit revenue growth over the coming years, but a more robust comparison to Microsoft should be reserved until IBM ignites additional growth engines.
As long as the price is above 175.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 187.74
- Take Profit 1: 197.00
- Take Profit 2: 209.00
Alternative scenario:
If the level of 175.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 175.00
- Take Profit 1: 167.00
- Take Profit 2: 158.00
