Does IBM Stock Still Have An Upside At $125?

by Trefis Team
+11.31%
Upside
120
Market
133
Trefis
IBM
IBM
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IBM’s stock (NYSE:IBM) has bounced back more than 30% since hitting a low of $95 on March 23 to reach its current level of $125. Notably, this compares to the 36% growth in the S&P 500 over the same period. We believe IBM stock still has upside potential. The key is the company’s stock is still about 6% lower than what it was at the beginning of 2020 and 13.5% lower than its value was at the end of 2016. Our dashboard ‘What Factors Drove -13.5% Change In IBM’s Stock Between 2016 And Now?‘ provides the key numbers behind our thinking, and we explain more below.

The stock price fell from $144 at the end of 2016 to $133 at the end of 2019, partially due to the 3.5% decline in IBM’s revenues from 2016 to 2019. This was accentuated by a decrease in net income margin from 14.9% in 2016 to 12.2% in 2019. As a result, the net income figure fell from $11.9 billion in 2016 to $9.4 billion in 2019. This resulted in the EPS shrinking 14.5% despite a 7% reduction in shares outstanding.

While the EPS trended lower, IBM’s P/E multiple rose from 11.6x at the end of 2016 to 12.5x at the end of 2019. This reflects a 7% rise from the end of 2016 until the end of 2019 due to the market’s expectation of better growth from the company. The multiple has dropped to 11.7x currently now due to the impact of the coronavirus outbreak, which we explain below.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This has adversely affected consumption and consumer spending. IBM’s stock is down by about 13% since January 31, after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a decline of about 6%. Moreover, about 78% of IBM’s total revenue comes from the U.S. and Europe, which are the worst impacted by the outbreak. The demand for IBM’s services has fallen in the short term as customers focus on their core expenses until things get clear. This is bound to hurt IBM’s revenues. Q1 results saw a fall in revenue by 3.4%, while Net Income fell by 26%.

We believe IBM’s Q2 2020 results will confirm the trend in revenues as the Americas and Europe will show negative growth. It is also likely to accompany a clearer Q3 as well as FY’20 guidance. However, if there are signs of abatement of the crisis by the time Q2 results are announced, the company’s stock could see an uptick. With a 13% fall in its stock price since January 31, 2020, IBM has underperformed Oracle (2.5%) and the S&P 500 (-5.6%) and looks like a candidate for strong recovery compared to its peers once market conditions improve.

View our dashboard analysis Coronavirus Trends Across Countries, And What It Means For The U.S. for the current rate of coronavirus spread in the U.S. and forecasts on where it could be headed, based on comparison with other countries. Our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture of historic crashes and how the sell-off in March compares.

IBM stock has declined in these uncertain times, but what about its peer HPE? See what drove changes in HPE stock over the recent years.

 

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