IBM's Investor Day Fails to Impress

IBM's (NYSE: IBM  ) management used its recent investor day to affirm its commitment to its target of $20 in earnings per share by 2015. Usually, this sort of news meets with a favorable response from the market, but the sell-off in the stock indicates that investors have some concerns. Not only does IBM have a lot to do to hit the target, but it's relying on its growth initiatives in areas where it faces increasing competition from rivals such as Oracle (NYSE: ORCL  ) and Microsoft (NASDAQ: MSFT  ) . So what do you need to know about IBM's strategy to return to growth?

IBM's skeptics multiply
Investment analysts tend to produce estimates that come pretty close to management's guidance or slightly above it. This fact makes the consensus forecast for IBM's 2015 earnings of $19.81 all the more interesting. As a group, they don't believe IBM will hit the number, and the following points mark why they might be skeptical. I'll start with a breakout of how IBM's segment revenues have grown in recent years.

Source: IBM Presentations

  •  As the chart above demonstrates, IBM is experiencing significant difficulties in growing revenue as even its service growth has turned negative.
  • As discussed in an article linked here, IBM's recent affirmation of its full-year EPS guidance for 2014 is de-facto a downgrade of its pre-tax profit expectations, because it lowered its estimate for its full-year tax rate.
  • Hardware revenue (in the systems & technology segment) has fallen off a cliff and is suffering from its exposure to weakening emerging markets.
  • IBM is relying on growth from its planned $1.2 billion investment in offering infrastructure as a service, or IaaS, but the market is becoming crowded with Oracle, Microsoft, and others investing aggressively in it.
  • IBM's planned $1 billion investment in its Watson supercomputer system in order to offer cloud-based Big Data analytics is exciting, but it contains the usual risks associated with business execution.

The first article linked above fleshes out many of the themes associated with the first three bullet points, but the last two are worth looking at in more detail. They both involve IBM investing in growth platforms; the company will need this in order to hit its EPS target in 2015.

IBM's investment in growth platforms
Amidst the doom and gloom of IBM's declining growth, its business analytics revenues have consistently beaten its expectations. For example, it had targeted $16 billion in big data analytics business by 2015, but upgraded this target to $20 billion in January after it surpassed the original target provided with last year's figures. Indeed, the success of its big data growth is surely behind the decision to invest in Watson.

Analysts think there is a lot more to come from IBM in business analytics. For example, J.P. Morgan analyst Mark Moskowitz estimates in a recent research report that IBM's business analytics revenue could hit $25 billion by 2017 and Watson could contribute $2 billion to this annually by 2017. These figures are significant in comparison with IBM's revenue of nearly $100 billion in 2013.

Similarly, the investment in expanding its IaaS services helps the company sell applications and solutions (such as Watson) to customers. Unfortunately, IBM is not alone in undertaking this kind of strategy. Oracle is investing heavily in order to try to convince customers to run new and existing Oracle applications on the Oracle IaaS. Microsoft is taking a similar approach with its IaaS offering, Azure, and there is little doubt that Oracle and Microsoft (among many others) are trying to shift away from the old model of on-premise on-license software toward cloud-based solutions. The IaaS market is not short of competition.

The bottom line
All told, IBM's growth platforms are exciting, but they don't come without the usual caveats associated with growth initiatives in highly competitive markets. Meanwhile, it continues to struggle with its traditional businesses.

In addition, the investment community continues to express a certain amount of skepticism over its $20 EPS target for 2015. It almost seems that the best thing that IBM could do to bolster enthusiasm for its stock would be to shelve the plan. Such an event would likely be a short-term negative for the stock, but it could create a great entry point.

Are you ready to profit from this $14.4 trillion revolution?
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980s, before the consumer computing boom. Or purchasing stock in e-commerce pioneer in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

Read/Post Comments (1) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 26, 2014, at 8:31 PM, SoBlue14 wrote:

    IBM is strongly inhibited from achieving the success that its investors expect and deserve by the poor management and leadership. IBM should remain strong in analytics and continue to beat targets, with Google serving as the only strong competitor. It needs to pick up its growth in cloud, which came a long way in 2014 but largely due to M&A. STG remains a major red flag, but Watson is key to driving future services revenue. The culture created by the poor leadership leads to a firm that is bloated, inefficient, and slow; M&A is over-utilized because IBM cannot keep up due to the centralized management that runs like the Federal Government and not a tech company. 2015 will be a record for IBM-the first time where a CEO is solely responsible for 3 years of revenue declines--and only the second time since 91/92/93 where IBM has declined in revenue for three consecutive years. IBM CEO says revenue growth is not a priority and her job is to allocate capital-or manage earnings. She reminds me of the girl in clueless....or somebody with an addiction to inhalants that has suffered brain damage and it takes years to respond to issues that should take days. With just decent leadership the stock should be $195 a share. Performance in line with the S&P over the past year $230. The performance in 2013 was so bad that the S&P now has outperformed IBM over the past 5 years. Thomas Watson is rolling over in his grave.......

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2967872, ~/Articles/ArticleHandler.aspx, 8/30/2015 10:28:02 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Lee Samaha

Investing commentary to help retail investors outperform professionals. I research and write post-earnings analysis of leading companies. Follow me on Twitter or Google+ to receive quick and thorough earnings analysis of your favorite stocks.

Today's Market

updated 1 day ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:03 PM
IBM $147.98 Down -0.56 -0.38%
International Busi… CAPS Rating: ****
JPM $64.13 Down -0.35 -0.54%
JPMorgan Chase & C… CAPS Rating: ****
MSFT $43.93 Up +0.03 +0.07%
Microsoft CAPS Rating: ***
ORCL $37.46 Up +0.64 +1.74%
Oracle CAPS Rating: ****