The technology sector has been one of the best performing sectors this year so far. However, not all the companies have fared that well. International Business Machines Corp. IBM is one of them.
IBM has been witnessing a year-over-year decline in its top-line over the last several quarters. The inconsistent revenue growth trajectory, slow transition to cloud, increasing competition and sluggish IT spending have been the major reasons behind the company’s dismal performance.
So far this year, IBM has lost 8.5% against Technology Select Sector SPDR ETF XLK gain of 32.3%.
What’s Hurting the Company?
IBM is under tremendous pressure due to its time consuming business model transition, which is negatively impacting results. Despite significant investments, the company is yet to gain a dominant position in the Infrastructure as a Service (IaaS), Platform as a Service (PaaS) and Hosted private cloud market. Intensifying competition in most of the markets is a major concern for the company.
Contrary to expectations IBM’s focus on becoming a major force in the Artificial Intelligence (AI) market with Watson has failed – at least in the near term.
Moreover, IBM’s continuing investments and pricing pressure related to its legacy hardware business is a concern. We believe the underperforming legacy business segments will remain an overhang on the company’s bottom line till the business model transition, which is heavily time-consuming, is completed.
IBM Corporation Revenue (TTM)
International Business Machines Corporation Revenue (TTM) | International Business Machines Corporation Quote
Is Any Turnaround Possible in the Near Term?
Although the company is undertaking a number of initiatives to counter the aforementioned challenges, its impact on quarterly results has not been significant.
We believe that IBM’s significant investments in “Strategic Imperatives” – cloud computing, mobile, cognitive technologies and AI – will take some more time to deliver credible top-line growth.
IBM has also undertaken a number of blockchain initiatives to grab the growth opportunity in the industry. However, all the efforts are at a very nascent stage and will take time to contribute meaningfully to top-line growth. This is a significant headwind in our view.
Moreover, Warren Buffett led conglomerate Berkshire Hathaway Inc.’s, the company’s largest shareholder, lowering of shares in IBM by 32% to 37 million in May raised concerns among investors and impacted the share price movement.
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We know that Buffett is a value investor as he mostly considers the intrinsic value (fair value of a stock calculated by its future earnings power) of a stock for making investment. His investment apart from value also includes understanding of the business, competitive advantages and capable management. Thus, the loss of Buffett’s confidence doesn’t bode well for the company.
We believe that the company’s turnaround efforts will yield results in the long run though its impact on near-term results will likely remain muted.
Zacks Rank & Stocks to Consider
IBM carries a Zacks Rank #4 (Sell).
Some better-ranked stocks in the broader technology sector include IPG Photonics Corp. IPGP, NetApp Inc. NTAP and NVIDIA Corp. NVDA, all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.
Long-term earnings growth rate for IPG Photonics, NetApp and NVIDIA is projected to be 12%, 11.3% and 10.3%, respectively.
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