Will IBM’s Stock Gain Momentum Later In The Year?

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International Business Machines

[Updated 09/29/2021] IBM Update

IBM’s stock (NYSE:IBM) at the current price of $138 is nearly flat compared to its price on the day of Q2 2021 earnings release which failed to generate momentum for the stock. For Q2 2021, the company had reported revenues of $18.7 billion, up 3% y-o-y, while earnings were slightly lower at $1.47 compared to $1.52 in the same period of the previous year. The Cloud segment was the silver lining for the company in the quarter as it recorded revenue of $7 billion, up 13%. Overall we expect the Cloud segment to lead growth for the company in the near future.

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We expect IBM’s revenues to be above $74 billion for 2021 while net income is expected to be $8.7 billion, increasing the EPS for the year to $9.80. For 2022, we expect revenue to improve to $75.9 billion taking its net income to $9.4 billion. This will improve its EPS figure to $10.72 in 2022, which coupled with the P/E multiple of 13.6x will lead to IBM’s valuation of $146, which is nearly 6% above the current market price.

[Updated 06/29/2021] IBM’s Stock Seems To Be Overvalued At $145

Having grown by 16.6% since the end of 2020 IBM’s stock (NYSE:IBM) seems to be above its near term potential. The company’s stock grew after its earnings release of Q1 2021 as the company beat consensus market estimates for both revenue and earnings. Q1 2021 revenue was recorded at $17.7 billion, up 1% y-o-y while operating income was recorded at $905 million, up from $-45 million in the same period of the previous year. Earnings fell to $1.07 for the quarter compared to $1.31 in the same quarter of the previous year. (Q1 2020 earnings were higher due to a tax benefit of $1.2 billion). The company has made a positive start to the year but the stock seems to be beyond its near term potential currently.

We expect IBM’s revenues to be above $74 billion for 2021. Further, its net income is likely to increase to $11.2 billion, increasing its EPS figure to $12.66 in 2021, which coupled with the P/E multiple of 11.1x will lead to IBM’s valuation of $140, which is 5% lower than the current market price.

[Updated 12/29/2020] IBM’s Stock Has More Than 10% Upside In Near Term

Having lost about 8% in 2020, IBM’s stock (NYSE:IBM) has growth potential. IBM’s stock has fallen from $134 to $123 in 2020 compared to the S&P 500 which moved 15% in the same period. The company has seen a revenue fall over recent years while its EPS has risen steadily. We believe the stock has potential for nearly 10% growth in the near term, as it is expected to recover beyond $135 (the price at which it was trading at the start of the year). 

Due to the Covid-19 crisis, organizations started shifting towards the cloud which has been the sole silver lining for IBM’s revenue. All the other segments have been hit due to the pandemic. Overall, IBM saw its revenues fall by 4% in the first nine months of the year, compared to the same period in the previous year. EPS was $4.72 for the first nine months compared to $6.45 in the same period of the previous year. Further, the company reported $12.3 billion in cash inflows from operating activities for the first nine months. We expect IBM’s revenues to fall by 3.5% to $74.4 billion for 2020. Thereafter, revenues are expected to grow to $74.9 billion in 2021. 

[Updated 7/23/2020] Can IBM Regain Pre-Corona Level In Near Term?

IBM’s stock (NYSE:IBM) has rallied 35% since late March (vs. about 45% for the S&P 500) to its current level of $126. This is after falling to a low of $93 in late March, as a rapid increase in the number of Covid-19 cases outside of China spooked investors, and resulted in heightened fears of an imminent global economic downturn. The stock is currently about 15% below its February 2020 high of $149. Are the gains warranted or are investors getting ahead of themselves? We believe that the stock recovery is justified, and think the stock price is likely to increase marginally from its current level in the near term.

How Did IBM Fare During 2008 Downturn?

We see IBM’s stock declined from levels of around $83 in October 2007 (the pre-crisis peak) to roughly $66 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 21% of its value from its approximate pre-crisis peak. This marked a drop that was smaller than the broader S&P, which fell by about 51%.

Further, IBM’s stock recovered strongly post the 2008 crisis to about $95 in early 2010 – rising by about 44% between March 2009 and January 2010, as against the S&P which bounced back by about 48% over the same period.

In comparison, IBM’s stock lost 37% of its value between 19th February and 23rd March 2020, and has already recovered 35% since then. The S&P in comparison fell by about 34% and rebounded by about 45%.

Is The Recovery Warranted & Can We Expect Further Gains?

The rally across industries over recent weeks can primarily be attributed to the Fed stimulus which largely quieted investor concerns about the near-term survival of companies. The flattening of Covid cases in the worst hit U.S. and European cities is also giving investors confidence that developed markets have put the worst of the pandemic behind them.

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending, which would lead to lower demand for software, hardware, and web services affecting IBM’s revenues. That said, the company is also well poised to benefit from the growing number of people globally who are working from home thanks to its portfolio of software as well as services aimed at remote collaboration. For Q2 2020 the company saw a fall in overall revenue by 5% y-o-y, though the Cloud & Cognitive segment saw a growth of 3% in the quarter.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. With investors focusing their attention on 2021 results, the valuations become important in finding value.

While IBM stock is likely to move higher in the near term, there are several peers in its sector that look like a Better Bet Than IBM Stock. Also, IBM Peer Comparisons summarizes how the company fares against peers on metrics that matter.

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