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Dow Jones Jumps 350 Points; IBM Stock Tumbles After Earnings; Intel to Sell Memory Chip Business

By Timothy Green – Oct 20, 2020 at 2:17PM

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IBM failed to convince investors that its stock was a good investment after another lackluster quarter, and Intel is unloading a noncore business.

The stock market was rallying hard on Tuesday, apparently due to optimism over a potential stimulus deal. The Dow Jones Industrial Average (^DJI -0.38%) was up 1.25% at 1:30 p.m. EDT; the other major indexes had gained similar percentages.

Two Dow components that failed to join in on the party were International Business Machines (IBM 0.40%) and Intel (INTC 0.43%). IBM stock slumped after the tech giant reported results and failed to provide any guidance, and Intel stock was down after the company struck a deal to unload its NAND chip business.

A Wall Street street sign

Image source: Getty Images.

IBM slumps after earnings report

IBM released preliminary third-quarter results earlier this month along with the announcement that it planned to spin off its managed infrastructure services business, so the company's numbers on Monday afternoon were not a surprise. Revenue was down 2.6% to $17.6 billion, and adjusted earnings per share fell 4% to $2.58.

IBM decided to not provide any guidance, given the uncertainty created by the COVID-19 pandemic. This lack of visibility may be one reason why the stock was down about 5.8% by early Tuesday afternoon. The company is still experiencing paused or deferred spending from some clients, particularly those in retail, airlines, and hospitality.

The good news is that many clients are doing just fine. "There is about in 70% of the industries that we are in, we are not seeing any pauses. We see clients that are healthy," said CEO Arvind Krishna during the earnings call.

IBM's cloud revenue, which is spread across its reporting segments, grew 19% to $6 billion. Revenue from Red Hat jumped 17% on a normalized basis, contributing to that cloud growth. Other areas didn't fare as well. Revenue from mainframes slumped 20% as some clients focused on preserving cash. IBM expects the adoption curve for the latest z15 mainframe to lengthen due to this behavior, but it expects the overall product cycle to be consistent with previous cycles.

The fourth quarter for IBM tends to be seasonally strong due to deals involving high-value software and hardware. With the pandemic leading some clients to pull back on spending, there's a lot of uncertainty for IBM this year. On top of that uncertainty, the launch of the z15 mainframe last year will make for a difficult comparison.

Analysts were largely neutral following IBM's report. Evercore maintained an "in-line" rating, saying that the company is on the right path. Morgan Stanley maintained an equal weight target and called IBM a "2022 stock," since the spin-off won't be completed until the end of 2021. And BMO Capital maintained a market perform rating, noting that patience will be necessary for investors.

Including Tuesday's slump, shares of IBM are down nearly 12% so far this year.

Intel sells flash memory business

Late Monday, chip giant Intel announced that it had agreed to sell its NAND memory and storage business to SK Hynix in a deal worth $9 billion. The sale includes the solid-state drive business, the NAND component and wafer business, and the Dalian NAND memory manufacturing facility in China.

Intel will continue manufacturing NAND wafers and retain all intellectual property until the final closing. Government approval is expected in late 2021, which will prompt an initial $7 billion payment from SK Hynix. The remaining $2 billion payment will come upon final closing, which is expected in March 2025.

NAND memory chips are a commodity product prone to extreme price swings. Intel has no competitive advantage in this business and selling it will free the company from some capital spending. Intel plans to use the proceeds to invest in long-term growth priorities.

Shares of Intel didn't get any boost from the announcement of the deal and were down about 1.2% by early Tuesday afternoon. The stock has slumped around 10% in 2020.

Timothy Green owns shares of IBM. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.

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