When a company with a sound balance sheet and long track record of success suffers a major sell-off, as IBM did immediately following its earnings announcement, there's reason to pause and analyze the business. For some, a significant drop in value is immediately followed by a call to an investor's broker to say, "Sell, sell, sell!" For disciplined investors, IBM's (NYSE:IBM) drop in stock price may warrant a closer look.
If you've been around the block once or twice, you know that momentum plays an undeniable role in short-term stock-price swings. Once negativity takes hold, it seems shareholders come out of the woodwork to unload their shares, and IBM's beaten down stock price may simply reflect negative momentum run amok. Or there may be some method to the IBM bear's madness.
A few specs
IBM took it on the financial chin across many of its operating segments, save a few notable bright spots. However, declining revenues in most areas were much too significant for IBM's positive cloud, mobile, and business analytics improvements to overcome.
Despite announcing a $1 billion restructuring plan earlier this year to trim jobs and realign divisions to better meet its new business objectives, IBM's expenses actually increased 1% compared to the year-ago quarter, to $6.5 billion. Combined with a 4% decline in total revenues, to $22.4 billion, IBM's earnings-per-share dropped 8% to $3.46, and net income was down a whopping 17% in Q3.
Cloud revenues were an exception to IBM's business unit losses, jumping 80% vs. the year-ago quarter, as were mobile revenues, which more than doubled, and two other key IBM divisions going forward -- business analytics and security -- also improved, up 8% and 20%, respectively. Considering these are all important facets of IBM's future, they are silver linings to an otherwise tough quarter.
Like one its primary cloud competitors Microsoft (NASDAQ:MSFT), IBM CEO Ginni Rometty has focused much of her energy on reinventing Big Blue from an old-school hardware business to a leader in cutting-edge sectors like mobile and cloud solutions. The difference between Microsoft and IBM, however, is Microsoft CEO Satya Nadella and team's transformation is already showing substantial signs of life.
It could be argued that as a software provider, Microsoft had a jump-start on reshaping its business to become a leader in mobile and cloud technologies, and that's legitimate. However, Rometty's been at the helm for nearly three years, and while no one would suggest IBM's transformation should be complete already, concerns about just how long it's going to take are also reasonable.
Though long known as a hardware provider, IBM does generate significant revenues from software: $5.7 billion of its $22.4 billion in sales last quarter came from its Software division. The nearly $6 billion in software revenues was a 2% drop compared to 2013's Q3, and margins declined, suggesting either price-cutting efforts to boost sales were unsuccessful, and/or Rometty has yet to get the aforementioned expenses under control. Based on last quarter's results, it may be the latter.
IBM has made no secret of its plans to become a leader in cloud, mobile, and business intelligence, or BI, solutions, and its making progress. As noted earlier, all three strategic areas continued to show signs of improvement, just as they have each of the last several quarters. Though the transition may not be happening as quickly as Microsoft's, at least it's happening.
On the expense front, IBM has also made headway in cutting money-losing businesses. It recently announced that the deal to sell its server unit to China-based Lenovo has closed, and IBM has also shed its money-losing chip unit to Globalfoundries, in a transaction that will cost IBM $1.5 billion over the next three years. Painful? Yes, but cutting the revenue-sapping units could payoff in the long run, by both cutting overhead, as well as better aligning remaining resources to its core strategies.
Final Foolish thoughts
An argument can be made for both bear and bull camps when considering IBM. For bears, one look at IBM's recently announced earnings, coupled with the time it's taking Rometty and team to right the ship, speaks for itself. For bulls, particularly those with a long-term investment horizon, IBM's stock slide is an opportunity: a chance to get in on what amounts to the ground floor by buying a tech leader in the midst of a difficult transformation.
Can IBM pull off what it appears Microsoft is doing; figuratively changing course mid-stream? Time will tell, but there's an old investment axiom that always comes to mind when industry leaders suffer big stock price losses: When's the best time to buy, when prices have peaked, or when everything's on sale? There's no denying, IBM just went on sale.