What happened
International Business Machines (IBM +0.90%) stock is up over 10% this week after reporting strong first-quarter earnings, according to data provided by S&P Global Market Intelligence. The century-old technology company posted better-than-expected revenue and earnings to start out 2022, causing investors to get more optimistic about the stock, and analysts to raise their price targets.
So what
On April 19, IBM reported its earnings for the first three months of 2022. Revenue came in at $14.2 billion, up 8% year over year, and non-GAAP (adjusted) diluted earnings per share (EPS) came in at $1.40. Both numbers slightly beat analyst expectations coming into the results, which is why investors decided to buy up the stock after the report.
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IBM is seeing strong growth from its software and consulting business lines. Software revenue grew 15.4% in constant currency in the first quarter to $5.8 billion. Given the high-quality nature of the software business, investors are likely getting more bullish as this becomes a larger part of IBM's overall business. Consulting revenue grew 17.4% in constant currency to $4.8 billion, driven mainly by technology and hybrid cloud consulting.
These results caught the eye of Wall Street analysts. Morgan Stanley raised its price target on IBM from $150 to $157 a share and Credit Suisse raised its price target to $166 a share. IBM's stock currently trades at $139 a share.
On top of the solid current results, IBM increased its 2022 guidance, with revenue now expected to be "at the high end of the mid-single-digit range."
Now what
IBM had a solid report, and seems to be doing fine with its software, hybrid cloud, and consulting business lines. However, this does not mean the stock is a buy now. The company is only slowly growing its consolidated revenue; has major competition from technology giants like Amazon, Microsoft, and Alphabet; and has a mountain of debt on its balance sheet.
Let's specifically look at the debt load. At the end of Q1, IBM had $54 billion in total debt, with $7.69 billion due within the next 12 months. The company expects to generate over $10 billion in free cash flow this year, so it shouldn't have any trouble paying down this debt. But just because the bondholders will come out clean does not mean a stock is a buy. With rising interest rates, IBM's debt expense is almost assuredly going to come up in the next few years when it refinances a lot of this debt to help sustain its high dividend yield. Combine this with the already large debt load and a consolidated business that is not growing rapidly, and it is hard to see how management can create true value for shareholders over the long haul. Given this is the case, there are much better options for investors to put their money in right now.
