Few companies have such a long and storied history as IBM (IBM), which set the course of computer technology for decades. Now, with the company having undergone a long and massive restructuring and putting a new chief executive at the helm, is IBM stock a buy?
Originally named International Business Machines, IBM helped pioneer multiple segments of the computer industry.
But IBM today is not the dominant force it once was. The rise of the internet and the explosion of new technology companies that emerged in the 1980s dramatically changed computer architectures. IBM’s giant mainframe computers, which could be the size of an elephant, became a metaphorical elephant.
The company was caught off-guard as customers shifted from centralized computing to a technology network that was highly distributed.
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Spending $120 Billion To Remake IBM
That caused IBM to begin a dramatic multiyear restructuring that accelerated in a big way on Oct. 10. IBM announced plans to spin off a $19 billion technology consulting business so it can focus more intently on cloud computing and artificial intelligence.
The business unit, called Managed Infrastructure Services, will be spun off into a new public company. It helps companies manage their technology infrastructure. IBM sees it as a tax-free deal completed by the end of next year.
The new company plans to focus on managing and modernizing client-owned infrastructures, a $500 billion market opportunity. It will provide hosting and network services, infrastructure modernization, and cloud migration services.
The multiyear transformation of IBM has focused on developing and expanding what IBM calls an open hybrid cloud platform.
“IBM is laser-focused on the $1 trillion hybrid cloud opportunity,” Chief Executive Arvind Krishna said in written remarks with the restructuring announcement.
A hybrid cloud architecture means IBM can provide its customers with both a public cloud and a private cloud, which gives a company extra network security. They share data and applications between them.
In the past 8 years, IBM has invested more than $120 billion in remaking the company. This includes $29 billion in capital expenditures, for things like scaling its cloud operations and artificial intelligence offerings and bolstering security and services capabilities.
Big Push Into Cloud Computing
The rising star at IBM is its Cloud and Cognitive Software business unit. It provides a variety of cloud computing services, data and transaction processing platforms. It also includes what IBM calls cognitive applications, which is another term for artificial intelligence. In the second quarter, this unit showed revenue of $5.7 billion, accounting for about 30% of IBM sales.
It’s also where IBM’s $34 billion deal to acquire Red Hat was placed. Red Hat provides an open source, cloud software business. It was key in IBM’s massive expansion into offering a hybrid cloud architecture to its customers.
“Hybrid cloud is the dominant force driving change in our industry, but it’s far from universal adoption,” Krishna said in the company’s second-quarter earnings conference call. “Only 20% of the workloads have moved to the cloud. The other 80% are mission-critical workloads that are far more difficult to move. There is a massive opportunity in front of us to capture these workloads.”
When the restructuring was announced Krishna said, “Now is the right time to create two market-leading companies focused on what they do best. The new company will have greater agility to design, run and modernize the infrastructure of the world’s most important organizations.”
Krishna’s Origins In Cloud Business
Krishna was previously senior vice president for the Cloud and Cognitive Software business. He officially took the reins as CEO in April, succeeding Ginni Rometty, who had led the company since 2012. At the time he became CEO, IBM stock jumped 5% on the news.
IBM derives cloud revenue from several of its business units. In the past 12 months IBM says it collected $23.5 billion in total cloud revenue, up 20% from the previous time span. In 2013, cloud represented only 4% of revenue. Today, it’s 30% and growing rapidly. In the second quarter, total cloud revenue at IBM jumped 30% to $6.3 billion.
Moreover, IBM has returned $97 billion to shareholders in the last eight years. It’s why IBM is considered a top dividend stock.
The major shifts in business operations help to explain why growth in revenue and earnings has been a struggle. In the past 19 quarters, revenue in 12 quarters showed declines or no growth from the year-ago period. Earnings performance also was weak.
IBM Earnings, Revenue Exceed Estimates
IBM reported second-quarter results on July 20 that beat analyst projections on the top and bottom line. The company reported adjusted earnings of 2.18 per share on revenue of $18.1 billion. Wall Street expected IBM earnings of $2.06 per share on revenue of $17.4 billion, according to FactSet Research.
It was the first full quarter since Krishna became chief executive. IBM has focused heavily on improving profitability over the last several years. But Krishna indicated he prefers to put more emphasis on revenue growth.
In addition to the restructuring news, IBM also provided its revenue and earnings outlook for the third quarter that were in line with Wall Street expectations.
IBM expects revenue of $17.6 billion vs. estimates of $17.56 billion. It expects adjusted earnings of $2.58 per share, the same as Wall Street expectations. IBM will report quarterly results on Oct. 19, after the market close.
Technical Analysis Of IBM Stock
A technical analysis of IBM stock is a key component of determining whether the shares are worth buying.
The IBD Stock Checkup Tool shows that IBM has a weak IBD Composite Rating of 44 out of a best-possible 99. The rating means IBM stock currently outperforms just 44% of all stocks in terms of the most important fundamental and technical stock-picking criteria. The best stocks will often rate 98 or 99 at the time they launch a big price run.
Along with its low Composite Rating, the stock also has a weak Relative Strength Rating of 36. The rating shows a stock’s price movement over the last 52 weeks against that of other stocks. Look for stocks with a rating of 80 or higher. The best stocks will often rate over 90 at the time they launch a big price run.
Another discouraging sign is IBM’s relative strength line. It tracks a stock’s performance vs. the S&P 500 index. Typically, the RS line of the strongest stocks is either confirming or leading a stock’s price into new high ground. IBM’s relative strength line has been trending lower since 2011, meaning it has underperformed the benchmark index for nine years. Investors would be better off putting their money in the S&P 500 until IBM stock can deliver consistent outperformance.
Is IBM Stock A Buy?
No, IBM stock is currently not a buy.
The stock had formed a first-stage cup with handle, with a 135.98 buy point. It came close to that on Oct. 10, the day IBM announced restructuring plans. But the stock retreated and fell below the 200-day moving average and is sitting at the 50-day line, both negative indicators.
Please follow Brian Deagon on Twitter at @IBD_BDeagon for more on tech stocks, analysis and financial markets.
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