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IBM

IBM (IBM) Q3 Earnings: What To Expect

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With its 4.54% annual yield, International Business Machines Corp. (IBM) has always been a great stock to buy for dividend investors. But it now appears “Big Blue” has become more appealing to growth investors as well. Following its highly-anticipated spinoff of Kyndryl, IBM provided some new long-term projections for what's to come. But will investors remain excited?

That answer may become more clear after the company provides its third quarter fiscal 2021 earnings results Wednesday after the closing bell. The tech giant has struggled to grow revenues over the past decade and has not benefited in the massive economic expansion that saw cloud leaders such as Amazon (AMZN) and Microsoft (MSFT) produce double-digit revenue gains. But as it transitions away from its legacy businesses, IBM’s turnaround has seemingly begun.

The company’s cloud ambitions have shown some promise in recent quarters and has provided ample revenue strength to support a higher multiple, thanks to the Red Hat acquisition which modernize the cloud business. The company is now forecasted to grow revenues by high single digits annually over the next 5 years. “With the spin-out of Kyndryl and the acquisition of Red Hat, you’re seeing that just under half of our portfolio is software, a little under one-third of it is consulting,” said IBM CEO Arvind Krishna in his presentation.

“These are both healthy drivers of growth with – within that, Red Hat growing at a very healthy rate,” Krishna added. The market has responded. IBM stock has rallied from about $115 back in January to over $150. While there is some near-term resistance, it appears the market is giving IBM more credit for the recent traction the company has made towards the cloud. But for the the shares to maintain their uptrend, the company on Wednesday will need to demonstrate continued operating leverage and revenue growth acceleration.

For the three-month period that ended June, Wall Street expects the New York-based company to earn $2.50 per share on revenue of $17.77 billion. This compares to the year-ago quarter when earning were $2.58 per share on $17.72 billion in revenue. For the full year, ending in December, earnings are projected to rise 21.5% year over year to $10.73 per share, while revenue of $75.12 billion would rise 2% year over year.

Lackluster revenue expansion and weak EPS growth have plagued the company over the five to ten years. The company just ended a streak of four quarters of declining revenue, posting 1.3% year-over-year increase in the first quarter, and followed that up with a 3.4% gain for the second quarter. In other words, it seems the turnaround is underway. Following the spinoff, IBM has structured a more simplified business with segments including Consulting, Infrastructure and Software. The latter includes services from Red Hat and cloud.

Wall Street has applauded these moves. But not everyone is convinced, including Morgan Stanley analyst Katy Huberty, who maintained Neutral rating on the stock, saying IBM is likely to produce “in-line-to-below expectations for the report. “Ahead of the separation, IBM now has to go back to customers and split existing long-term contracts into two separate core IBM and Kyndryl contracts,” Huberty said.

It would seem there remain several skeptics about the company’s efforts to transform itself for the new age. While there has been notable progress, IBM hasn’t shown it can beat the competition. Until there is consistent growth, the stock’s appeal will be for its dividend. And that’s not necessarily a bad thing.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Richard Saintvilus

After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.

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