3 Reasons International Business Machines Corporation Stock Could Rise

Big Blue’s stock has been mired for much of 2017, but that could change if it can deliver in a few key areas.

Tim Brugger
Tim Brugger
Jun 28, 2017 at 9:28AM
Technology and Telecom

The year started on a fairly positive note for IBM (NYSE:IBM) shareholders. It appeared that investors and pundits alike had finally gotten on board with IBM's ongoing transformation from legacy businesses to its leadership position in the cloud, data security, cognitive computing, mobile, and Internet of Things markets.

But the good tidings came to an abrupt halt following IBM's first-quarter earnings announcement on April 18. Though IBM stock is inching its way back up, it remains 9% below its share price of $170.05 the day before the company shared its first-quarter results.

That said, IBM is hardly dead in the water, and if it can fill in a couple of gaps, it could prove to be a value investor's dream stock.

A finger touches an illustration of a cloud, demonstrating IBM's suite of cloud solutions.

Image source: IBM.

A reversal of fortune

With last period's 3% sales drop to $18.2 billion, IBM stretched its quarterly revenue declines to a staggering 20 straight. While IBM did deliver in a number of important areas, pundits focused on the revenue string and kick-started the sell-off.

Can IBM reverse the streak and post an even nominal year-over-year sales bump in an upcoming quarter? If so, IBM could be seen to have turned the corner, and perhaps then investors would start to focus on its high-growth areas rather than zero in on total revenue.

Regardless of revenue growth this year, IBM expects a slight improvement in earnings per share to $13.80, excluding one-time items, up 1.5% from last year's $13.59 -- and that's without revenue growth. When IBM does reverse the revenue streak, its stock will almost certainly rise.

Lean and mean

One of the reasons IBM expects an EPS boost in 2017 despite easing revenue is that its expense management initiatives are beginning to take hold. IBM has invested billions of dollars to kick-start its strategic-imperatives push, and now it's time to circle the wagons and focus on becoming more efficient, as it did last quarter.

In large part because it shaved $860 million off sales, general, and administrative overhead, IBM's total operating expenses shrank 17% last quarter, to $6.35 billion. IBM's multiple acquisitions and investments in its strategic imperative-related efforts continue to affect gross profit margin, but last quarter may be indicative of a leaner business.

Gross profits margin fell to 42.8% from last year's 46.5%. If IBM continues to successfully manage expenses, which will help turn around that declining margin trend, its stock will take a turn for the better.

Delivering where it counts

For investors with a long-term outlook, IBM's strategic-imperative results should be top of mind. The cloud and similar cutting-edge technologies are where IBM's future will be determined. That said, not only maintaining growth but also ramping up sales in these up-and-coming markets would give its stock a boost.

Lost amid the negativity surrounding IBM's top line was the combined 12% increase in strategic-imperatives revenue of $7.8 billion last quarter. The units generated 43% of sales, led by a whopping $14.6 billion annual cloud revenue run rate, $8.6 billion of which was service-related. That was a nearly three-fifths rise in service-related sales.

Other than Microsoft (NASDAQ:MSFT) and its more than $15.2 billion annual cloud sales, IBM is at or near the top of the heap in what pundits expect will become a nearly $250 billion market this year. It's no wonder Microsoft is as focused as IBM on its cloud offerings, which is also primarily service-oriented.

But who knows? If IBM can secure a few more deals such as its recent $1.7 billion cloud agreement with a U.K. banking giant, it may leave Microsoft in its wake. Combined with delivering in other critical areas, Big Blue and its 3.9% dividend yielding stock will almost certainly rise.