In Focus: IBM
Updated: Jan 26, 2020
Thanks for checking out this week's In Focus, our look into a company, companies, or markets that made Wall Street's news cycle. This week we bring IBM in focus.
Big Blue IBM (IBM) reported earnings on January 22, 2019 and surprised Wall Street with an earnings beat. The company beat analyst earnings per share estimates by $0.05 and revenue estimates by $30 million dollars. The stock opened the week at $123.30 and closed the week at $133.97 per share,
What Wall Street Was Thinking
I really can't put my finger on what drove Wall Street to pile into IBM. The $21.7 billion dollars of revenue in Q4 2018 was down 3.5% from Q4 2017.
IBM's revenue and net income continue to decrease. Operating cash flow and free cash flow have been relatively steady over the past five years; and according to the company's Q4 2018 overview IBM finished 2018 with $79.6 billion in revenue and $11.9 billion in free cash flow.
From IBM's last five annual reports and it's most latest quarterly report, I've been unable to figure out why Wall Street is pouring money into IBM.
Truth be told I actually hate the "sex sells" tag line. My feelings mimic those of Don Draper, the thinking behind "sex sells" is lazy. Wall Street though does like sexy, specifically a sexy story and product and this is what IBM lacks.
If I informed you that IBM makes money through cognitive solutions, global business software, technology services, & cloud platforms and systems, what would be your response? To a lot of people all of the above are boring, not as sexy as an iPhone, Alexa speaker, or gaming laptop. When was the last time your favorite YouTube tech reviewer reviewed an IBM product?
A company's viability and long-term outlook shouldn't come down to their ability to manufacture and sell a sexy consumer products, but at this moment on Wall Street it does. Unless IBM can show revenue growth and signs of domination in any of the segments they operate in, the money needed to push this stock to new heights will stay away.
Where Money Flows
On Wall Street money flows to a few places, here are three.
1. A company with a revolutionary ideal or service, the company could be losing money but the product or service is a game changer - think Netflix
2. A company that dominates the market it operates in, and investors believe the company will continue to dominate it's market - think Amazon
3. A solid company whose stock price is well below it's intrinsic value.
Which of the three is IBM?
Hold on Tight, It's Going to be Smooth Sailing
Whenever I think about investing in IBM I remember this interview with Chatham Palihapitiya. IBM's stock is in a hurry to go nowhere. It does make money so it's not worth trying to go short, but it doesn't have that thing that attracts Wall Street's money, which is needed to push the stock higher. I'd rate IBM a HOLD at this moment. My reason for the hold rating is because the story just isn't sexy enough to warrant your investment dollars. Don't be fooled by the money that has poured into IBM this week. A boring company is great when it's extremely undervalued, IBM is far from being undervalued.
This is where I leave you, with a Hold rating on IBM. Thanks again for checking out this weeks In Focus review.