Is IBM (IBM) still considered a “blue chip” company? With its shares down 9% and 24% over the respective three years and five years, Big Blue’s standing as a bellwether often comes into question.
IBM is set to report second quarter fiscal 2018 earnings results after the closing bell Wednesday. Wall Street will look to see if the Armonk, NY.-based tech giant, lead by CEO Ginni Rometty, can show that its Strategic Imperatives business can produce higher profit margins to offsets the revenue declines in the legacy business. The company is attempting to transform itself for the new age, but it continues to attract doubters.
This is because IBM’s success, particularly in the areas of technology services, cloud-platform and cognitive-solutions (includes IBM’s Watson AI) will determine its future. The main question heading into the quarter is, to what extent have these newer businesses grown to make investors see IBM as a major cloud player that can compete with the likes of Amazon (AMZN), Microsoft (MSFT) and Salesforce (CRM)?
For the quarter that ended June, Wall Street expects the company to earn $3.04 per share on revenue of $19.9 billion. This compares to the year-ago quarter when earning were $2.94 per share on $19.29 billion in revenue. For the full year, ending in December, earnings are projected to rise 1.2% year over year to $13.80 per share, while revenue of $80.6 billion would rise 1.8% year over year.
In terms of the technology services and cloud-platform revenue, analysts expect a rise 2.6% to $8.63 billion, while cognitive-solutions revenue is expected to rise 4.4% to $4.76 billion from the year-ago quarter. While, there are signs of significant progress in terms of higher margin/higher growth endeavors, revenue remains an issue. In Q1 IBM shares were punished, falling almost 8% even though its results topped Wall Street expectations. Investors realized that the beat was driven by a one-time tax gain of $817 million in the quarter.
What’s more, James Kavanaugh, the company’s CFO, spooked investors by downplaying the company’s revenue chances in the coming quarters, telling analysts that new mainframe sales in the second half of the year won’t maintain first-half levels. While a legacy business and highly cyclical, the mainframe business drove an 8% surge in IBM’s systems business growth revenue, reaching $1.5 billion in Q1.
So the idea that mainframes could weaken in the second half, while the cloud and AI businesses have yet to pick up steam will make for a challenging six months. All in all, it’s tough to argue that IBM is heading in the right direction. But while IBM shares are cheap (trading at just 10.5 times fiscal 2018 estimates), making a play on the stock today still requires a certain level of conviction and patience that I don’t have.