Dow Jones Posts Modest Gain as Slack Files Microsoft Antitrust Complaint, IBM Stock Upgraded
The Dow Jones Industrial Average (DJINDICES: ^DJI) was up a modest 0.3% by 11:30 a.m. EDT Wednesday, outperforming the other major stock indices. Weighing on the market was a decision by the U.S. to force the closure of a Chinese consulate in Houston that prompted a retaliation threat from China, escalating tensions between the two countries.
Shares of Microsoft (NASDAQ: MSFT) and International Business Machines (NYSE: IBM) pushed higher on Wednesday, helping to drive the Dow's gain. Microsoft stock was up despite rival Slack filing an antitrust complaint in the EU, and IBM stock surged following an analyst upgrade.
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Microsoft hit with EU antitrust complaint
Microsoft has one big advantage in the collaboration software business: Microsoft Office. The company has a huge base of business customers already paying for the iconic productivity suite, and the quickest way to boost adoption of a new product is to simply bundle it with Word, Excel, and PowerPoint.
That's exactly what Microsoft has done with Teams, its workplace messaging and videoconferencing product that takes on both Slack (NYSE: WORK) and Zoom. Microsoft's Office 365 subscriptions aimed at businesses include access to Teams at no extra charge, creating a strong incentive for existing Office customers to choose Teams over the alternatives.
Slack has a problem with this strategy. On Wednesday, Slack asked European Union antitrust regulators to begin an investigation into Microsoft, alleging that the tech giant is using its dominance in the productivity software market to boost Teams.
"Microsoft has illegally tied its Teams product into its market-dominant Office productivity suite, force installing it for millions, blocking its removal, and hiding the true cost to enterprise customers," Slack said in a press release announcing the complaint.
It's certainly true that Microsoft is leveraging Office to drive adoption of Teams. Whether that constitutes a breach of EU antitrust law is unclear. EU antitrust regulators will review the complaint and determine whether a formal investigation is in order.
Microsoft stock didn't react to the news on Wednesday, up 0.9% by late morning. The stock has soared about 32% since the start of the year.
IBM gets post-earnings upgrade
IBM's second-quarter earnings report earlier this week beat analyst estimates across the board, although both revenue and profit declined as a result of the pandemic. The company showed solid growth in cloud computing, while its large services segments suffered declines.
On Wednesday, Argus upgraded IBM stock from hold to buy and gave it a $155 price target. Argus analyst Jim Kelleher sees IBM's hybrid cloud business accelerating, driven by the $34 billion acquisition of Red Hat. IBM has only been able to include a portion of Red Hat's revenue in its results since the acquisition closed due to deferred revenue accounting rules, but that reporting headwind is fading.
Kelleher expects some of IBM's legacy business to continue to offset growth in faster-growing areas, especially businesses exposed to industries that were hit hard by the pandemic. In the second quarter, while the cloud and cognitive software segment managed to grow by 5%, the services segments were hurt by clients pulling back on discretionary spending and lower volumes from "challenged industries."
A value case can be made for IBM stock. While the company pulled its guidance this year due to the pandemic, it was previously expecting to produce adjusted earnings per share of at least $13.35. The current stock price is less than 10 times the old earnings guidance.
IBM stock was up about 2.3% late Wednesday morning following the upgrade. Shares of the tech giant are down about 6% year to date.
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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Timothy Green owns shares of IBM. The Motley Fool owns shares of and recommends Microsoft, Slack Technologies, and Zoom Video Communications and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, and short August 2020 $130 calls on Zoom Video Communications. The Motley Fool has a disclosure policy.
