Last Minute Thought: Buy or Sell IBM Before Earnings?

Over the last few years – and certainly since the March crash - tech stocks have been on a tear. However, veteran tech giant IBM (IBM) has found it difficult to keep up, and has lagged behind the whole market. Yet, with F2Q earnings due today after market close, could sentiment be changing?

With the Street calling for a year-over-year drop of 35% to revenue of $17.7 billion and EPS to decline by 8% to $2.07, Merrill Lynch analyst Wamsi Mohan argues the low expectations could provide IBM with a minor victory when it releases its quarterly statement this evening.

Mohan said, “We expect IBM to report a small beat relative to a very depressed consensus in the wake of COVID-19. Consensus is modeling a flat q/q trend vs normally up mid-single digits. However, while near term trends will be scrutinized, we think the more important catalyst will be an update from CEO Arvind Krishna at a later point in 2H20.”

The problem for IBM has been one of reduced profits and declining revenue from its legacy businesses. This is something the company has been addressing with its pivot toward one of 2020’s most prominent trends – the accelerated move to cloud-based services. Last year’s $34 billion acquisition of open source, enterprise software maker Red Hat was the biggest in its history and a statement of intent. The onus is now on new CEO Arvind Krishna - whose appointment in April couldn’t have come at a worse time - to make his mark.

For Mohan, “the potential for the new CEO to articulate his vision to drive growth,” along with a 5% dividend yield, means at present, IBM’s "valuation remains attractive.”

Therefore, ahead of the print, Mohan reiterates a Buy rating on IBM along with a $145 price target. The implication for investors? Potential upside of 15% from current levels. (To watch Mohan’s track record, click here)

Street sentiment toward IBM is currently split down the middle, with a tilt toward the bulls. IBM's Moderate Buy consensus rating is based on 4 Buys and Holds, each. With an average price target of $135.43, there’s possible upside of 7% over the next 12 months. (See IBM stock analysis on TipRanks)

To find good ideas for tech stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

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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