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Thursday, January 20, 2022

Will Q4 earnings reboot the IBM share price?

Will Q4 earnings reboot the IBM share price?
Will Q4 earnings reboot the IBM share price?

IT giant IBM [IBM] is expected to report a 77.78% growth in year-over-year earnings and a 10.22% dip in revenues when it releases its fourth-quarter figures on 24 January. According to Zacks, the group is tipped to report earnings of $3.68 per share and revenues of $18.28bn.

During the quarter, the group spun off its managed infrastructure services into a new, publicly traded business called Kyndryl Holdings [KD]. It started trading on the New York Stock Exchange in November, allowing IBM to focus on being a hybrid cloud and AI company.

“We continue to make progress in our software and consulting businesses, which represent our higher growth opportunities,” said Arvind Krishna, IBM chairman and chief executive when announcing the previous quarter's results. “We are confident in achieving our medium-term objectives of mid-single digit growth.”

How will the spin-off impact IBM’s earnings?

The business separation seems like the key factor behind the anticipated earnings boost in Q4.

According to The Motley Fool, Kyndryl’s net loss for the first three quarters of 2021 was $1.6bn; up from $1.3bn over the same period a year ago, weighing on IBM’s share price.

Kyndryl’s revenues were also slipping. In the first three quarters of 2021, IBM had revenues of $54.1bn with Kyndryl accounting for $14.1bn of that. However, that was down from $14.4bn in 2020, further dragging the company share price.

In contrast, IBM’s cloud business has climbed 14% over the past 12 months, and is likely to have sustained growth in the latest quarter. This could have supported IBM’s share price, but despite the growth, its cloud and AI businesses are struggling to increase at the pace needed to offset lost Kyndryl revenues.

Analysts slam IBM

UBS analyst David Vogt is certainly not convinced of the demerger. Vogt recently changed from a ‘neutral’ to a ‘sell’ position on the IBM stock, and lowered price target to $124 from $136. On 18 January, the IBM share price closed at $132.94.

Vogt believes that although the public cloud market will continue to be one of the fastest-growing IT categories at a 25%–30% compound annual growth rate over the next five years, IBM is unlikely to keep up with this pace.

The market is already dominated by the likes of AWS from Amazon and Microsoft’s Azure, Vogt explains. “Our detailed bottom-up analysis of IBM’s remaining segments supports our view that roughly 50% of IBM’s top-line is unlikely to grow long-term and could decline,” Vogt said.

How did IBM perform in Q3?

The expected fourth-quarter performance compares with a 0.3% climb in year-over-year revenues in the third quarter. Earnings per share in Q3 came in at $2.52.

During the quarter, IBM’s cloud and cognitive software segment saw revenues rise 2.5%, while revenues for cloud and data platforms, a sub-category in this segment, were up 10%.

James Kavanaugh, IBM senior vice president and chief financial officer said: "Our post-separation portfolio mix is shifted toward our growth vectors, with a higher-value recurring revenue stream and strong cash generation.”

IBM’s share price

IT giant IBM is expected to report a 77.78% growth in year-over-year earnings and a 10.22% dip in revenues when it releases its fourth-quarter figures on 24 January. According to Zacks, the group is tipped to report earnings of $3.68 per share and revenues of $18.28bn.

During the quarter, the group spun off its managed infrastructure services into a new, publicly traded business called Kyndryl Holdings. It started trading on the New York Stock Exchange in November, allowing IBM to focus on being a hybrid cloud and AI company.

“We continue to make progress in our software and consulting businesses, which represent our higher growth opportunities,” said Arvind Krishna, IBM chairman and chief executive when announcing the previous quarter's results. “We are confident in achieving our medium-term objectives of mid-single digit growth.”

24% SPYX'S SHARE PRICE SURGE OVER 12 MONTHS 24% SPYX'S SHARE PRICE SURGE OVER 12 MONTHS

IBM’s share price movement

The IBM share price fell 14.6% in the month following 20 October’s third quarter announcement to $115.81. It bounced back to hit $138.22 on 5 January, but fell once again after the pessimistic UBS note.

Over the last 12 months, its share price has climbed 9.3% compared with rivals Oracle up 41.9% and Accenture up 39%.

According to Market Screener, analysts have a consensus ‘hold’ rating on the IBM stock and an average target price of $144.87.

Goldman Sachs has a $140 price target for IBM’s stock price, but the firm seems more optimistic than UBS about IBM’s cloud focused future. Analyst Brian Essex said, “The company is moving in the right direction [but] its transition could take time,” reported The Fly.

The Motley Foolcontributor Robert Izquierdo has confidence in IBM’s hybrid cloud approach. It combines public cloud solutions like AWS with private cloud businesses “such as banks that need regulatory compliance and added security to protect sensitive data. IBM has successfully carved out a piece of the cloud computing pie for itself.”

Questions for IBM's management

When announcing Q4 results, analysts are likely to seek cues on IBM’s refocusing, thoughts on cloud strategy and demand, and the impact of the pandemic on demand from enterprises.

IBM’s recent purchase of sustainability-focused data and analytics software provider Envizi will also be in the limelight. It helps companies meet environmental targets and measure environmental impact. The size of the green opportunity for IBM and other sectors of growth for the business could trigger a run in the share price.

Having freed itself from its legacy businesses, IBM’s business has a clear path to the future ahead of it. Rests to be seen whether investors reward the shares.

Source: This content has been produced by Opto trading intelligence for Century Financial and was originally published on cmcmarkets.com/en-gb/opto

Disclaimer: Past performance is not a reliable indicator of future results.

The material (whether or not it states any opinions) is for general information purposes only and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Century Financial or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

Century Financial does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and Century Financial shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

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