With the company's 2014 first-quarter earnings report scheduled to be released after the market closes on Wednesday, analyst expectations are for IBM (NYSE: IBM ) revenue to come in slightly below last year's first-quarter total of $23.4 billion. IBM's earnings are on average expected to reach $2.54 per non-generally accepted accounting principles share, below 2013's $3.
With dour numbers like these, it's no wonder IBM's share price is up a meager 5.4% year to date, and down over 6% the past 12 months. If the analysis of IBM stopped after a review of its bottom line, a lackluster stock price would make sense. But there's opportunity for investors willing and able to focus on a couple key areas of IBM's pending earnings report.
What really matters
There's a reason IBM CEO Ginni Rometty and her executive team opted to forgo their annual incentive bonuses following 2013 fourth-quarter and annual earnings results. After being pummeled by the declining PC market -- IBM's systems and technology group revenue declined 26% last quarter -- forking out fat incentive checks would have rankled shareholders.
If that sounds familiar to Microsoft (NASDAQ: MSFT ) fans, it should. After announcing a solid earnings report of its own last quarter -- its fiscal 2014 third-quarter earning release is scheduled for next week -- the tech giant cited "continued softness in the consumer PC market" as the reason Windows OEM revenue declined.
As with Microsoft, a look beyond the drop in PC-related revenue is warranted. IBM performed well in the areas that matter most as it continues what Rometty called the company's "long-term strategy of industry leadership and continuous transformation." Non-GAAP earnings, what IBM calls "operating earnings," were up significantly in the last quarter, despite weakness in its traditional lines of business.
IBM's solid, if not spectacular, bottom line was the result of executing on several initiatives. Expenses remained in check, and will be an important factor in how IBM fares in tomorrow's earnings report and for the balance of the year. Improved margins were also instrumental in IBM ending 2013 on a relative high note, climbing 3 percentage points on a non-GAAP basis, to 23.9%.
What should really have investors intrigued are the strides being made in Rometty's "continuous transformation" efforts. As is the case with Microsoft, IBM was late to cloud computing, but it is quickly becoming a significant player. While Microsoft steadfastly abstains from reporting its cloud results -- though cloud revenue "more than doubled" last quarter -- IBM is more than happy to share its success.
Cloud-related revenue jumped 69% to $4.4 billion in 2013, and if the fourth quarter's annual run rate continues, about half of its cloud sales are derived from software as a service solutions. With the cloud pricing wars in full swing, growth will come from cloud-related services, not hosting. And that's where IBM, and Microsoft for that matter, separates from the pack.
While Microsoft has cloud services such as Office 365 to help drive growth, IBM is taking a different tack. Data collection, assimilation, and utilization, all via the cloud, is IBM's differentiator. The good news for investors is that IBM is making meaningful headway incorporating its big data and business analytics into one, incredibly robust cloud package. Business analytics generated $15.7 billion in revenue last year, up 9% from 2012. Factor IBM's cognitive super computer Watson into the cloud and analytics mix, and it's clear Rometty has Big Blue moving in the right direction.
Final Foolish thoughts
IBM is hardly done transforming itself into a cloud, big data, and cognitive computing powerhouse. But IBM makes a compelling argument for long-term, buy-and-hold investors today. Based on 2014 expectations, IBM is trading at a dirt cheap 9.96 times forward earnings. That compares to 13.6 times this year's expected earnings for Microsoft.
IBM's relatively low stock price should already appeal to many a value investor. Sure, IBM's PC group is likely going to be down again tomorrow, but that shouldn't be overly concerning. What really matters is how IBM performs in the cloud and business analytics, and you can bet both results will impress.
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