What To Expect From IBM’s Q2 Earnings?

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IBM: International Business Machines logo
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International Business Machines

Computing behemoth IBM (NYSE:IBM) is slated to report its Q2 2022 results on July 18th. We estimate that IBM’s revenue will come in at about $15.3 billion for the quarter, marginally ahead of the consensus estimate of about $15.25 billion. We estimate that earnings will stand at close to $2.33 per share, compared to a consensus of $2.29 per share. So, what are some of the trends that are likely to drive IBM’S results?

IBM spun off its slow growth and low-margin managed IT services business last year, with the company now focusing on areas such as cloud and artificial intelligence. We expect IBM’s core software and services operations to be the key drivers of the growth over Q2.  For perspective, over Q1, software revenue rose by 12.3% year-over-year to $5.8 billion, coming in well ahead of consensus. Consulting revenue also surged 13.3% to $4.8 billion. While the infrastructure business, which includes mainframe hardware, saw slow growth over Q1, we expect it to pick up a bit, as IBM launched a new generation of mainframes earlier this quarter. That said, it’s likely that IBM will face some currency-related headwinds, with the U.S. dollar appreciating strongly versus other currencies in recent weeks, driven by recession fears and the Fed’s relatively aggressive rate hikes.

We think IBM stock could move a bit higher following its Q2 earnings. At the current market price of about $138 per share, IBM stock trades at just about 14x consensus 2022 earnings and just about 13x projected 2023 earnings. This makes the stock a reasonably good value pick in a market where investors are increasingly prioritizing earnings and cash flows. Moreover, IBM could also hold up reasonably well in the event of an economic downturn in the United States. Chief executive, Arvind Krishna, has indicated that even if global growth cools,  spending on information technology will still come in about 4% to 5% ahead of GDP. We value IBM stock at about $153 per share, roughly 10% ahead of the current market price.

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See our analysis  IBM ValuationExpensive or Cheap for more details on what’s driving our price estimate for IBM. Also, check out the analysis of IBM Revenue for more details on how IBM revenues are trending.

While IBM stock has fared better than the broader market rising by about 2% year-to-date, the economic outlook looks increasingly uncertain, with the Fed raising rates amid surging inflation. See how low can IBM stock go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

 Returns Jul 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 IBM Return 0% 5% -15%
 S&P 500 Return 3% -18% 74%
 Trefis Multi-Strategy Portfolio 7% -18% 227%

[1] Month-to-date and year-to-date as of 7/8/2022
[2] Cumulative total returns since the end of 2016

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