Technology

Why IBM Investors May Have Much More Risk Than Reward

Paul Ausick

Published: January 29, 2017 9:01 am

Last Updated: January 12, 2020 3:24 pm

Compared with the S&P 500 index, International Business Machines Corp. (NYSE: IBM) is underperforming big-time.  Over the past five years, Big Blue’s shares were off 10%, trading at $171 on January 20. For the same period, the S&P 500 had risen 72% to 2,271.

Last Monday afternoon the company reported quarterly earnings per share (EPS) of  $5.01 and $21.8 billion in revenue versus consensus estimates from Thomson Reuters that called for $4.88 in EPS and $21.64 billion in revenue. As of Friday’s close IBM shares gained more than 4% last week while the S&P managed a gain of only 1%.

Impressive results have not changed some analysts minds about the overall direction of IBM shares over the next 12 months. What’s the story?

At Credit Suisse, analyst Kulbinder Garcha stuck with his Underperform rating and $110 price target on IBM. The company continues to face long-term and structural challenges that will limit improvement in services and software margins.

Another non-believer is James Kisner at Jefferies. He also reiterated an Underperform rating and price target of $125. In his comments on Big Blue, Kisner said:

Q4 EPS was a bit better than Consensus, but upon closer inspection we view the results as an operational miss given a lower-than-expected tax rate and large IP income (there was ‘hair’ on the quarter). Commentary around Q1 and 2017 EPS guidance similarly gave us concerns about earnings quality. We are keeping our Underperform rating.

Increasing profits because the company’s tax rate fell is hardly a long-term strategy. Falling margins along with falling revenues (down from $22.06 billion in the fourth quarter of 2015) are likewise not terribly strong indicators of growth.

For example, buried in IBM’s earnings report is revenue from the Watson artificial intelligence program, which has become the IBM flagship brand. Management must be painfully aware each quarter when it offers no clue about the performance of this initiative. If Watson were a roaring financial success, IBM would be printing up T-shirts.

IBM shares closed Friday at $177.30 in a 52-week range of $116.90 to $179.25. The stock’s 12-month consensus price target is $163.55, yet another indication that shares may be overbought.