International Business Machines Corporation (IBM), better known as IBM, has always been a great stock to buy for dividend investors. But has the company become more appealing to growth investors as well? That answer may become more clear after the company releases its second quarter fiscal 2021 earnings results Monday after the closing bell.
Not only has the tech giant struggled to grow revenue over the past decade, IBM has been left out of the massive economic expansion that saw cloud leaders such as Amazon (AMZN) and Microsoft (MSFT) produce double-digit revenue gains. But as the company transitions away from its legacy businesses, IBM’s turnaround has seemingly begun. Thanks to the Red Hat acquisition, which modernized its cloud business, IBM’s cloud ambitions have shown some promise in recent quarters. The questions is whether IBM can sustain that growth trend to support a higher multiple.
The company is now forecasted to grow revenues by high single digits annually over the next five years. Meanwhile, the stock has rallied from about $115 back in January to near $140. Accordingly, the stock is now facing some key resistance. The market is now, understandably, taking a wait-and-see attitude with Monday’s earnings results. Given how long investors have waited for the real turnaround in IBM to begin, the market will want to see continued revenue acceleration on Monday before believing IBM deserves to be in the “growth” category for investors.
For the three-month period that ended June, Wall Street expects the New York-based company to earn $2.29 per share on revenue of $18.29 billion. This compares to the year-ago quarter when earning were $2.18 per share on $17.72 billion in revenue. For the full year, ending in December, earnings are projected to rise 23.7% year over year to $10.91 per share, while revenue of $74.27 billion would rise about 1% year over year.
Lackluster revenue expansion and weak EPS growth have plagued the company over the past five to ten years. But the turnaround could be underway. Aside from the reported numbers, the market will also focus on the company’s recent announcement to spin off of its managed information services business which is has named Kyndryl. Broken down into Cloud, Applications Data & AI, Security & Resiliency, Core Enterprise & zCloud, Network and Edge, and Digital Workplace, the Kyndryl spinoff is expected to complete before the end of 2021.
This is the company’s latest effort to transform itself for the new age. It comes at a critical time for IBM, given that the cloud market is still projected to grow by double-digit percentages in the next five years. And according to Mordor Intelligence, the Hybrid Cloud Market — which was a $52 billion market in 2020 — is forecasted to reach $145 billion over the next five years, rising at a compound annual growth rates of almost 20%. Investors will want to know how much of that market can IBM acquire.
The company’s cloud improvements are notable, indeed. But IBM’s ability to drive mid single-digit growth consistently after the spinoff will be a key focus of the conference call on Monday. And if the company can boost revenue in the double-digit range by the end of 2022, IBM stock may finally recapture the $200 mark.
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