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International Business Machines Corp (IBM - Free Report) has been a disappointment for growth savvy investors’ due to its sluggish results in the last five years. We note that since 2011, the company’s top-line has declined annually, which has affected earnings growth rate despite sizeable share buybacks and cost saving initiatives over the period.

IBM has been moving away from its traditional businesses to newer (read lucrative) business avenues like cloud and data analytics. Though IBM’s “Strategic Imperatives” (cloud, analytics, mobility and security) are performing well, the recently announced first-quarter 2017 results exhibited that these are not enough to suffice the weakness in traditional businesses yet.

We note that the overall weakness has hurt IBM’s returns in the last five years. The company has lost 18.3% against S&P 500’s gain of 73.1%.



Intensifying Competition Hurting Profitability

We believe that intensifying competition in most of the “Strategic Imperatives” is hurting IBM’s profitability. This is primarily due to continuing investment, which is necessary in order to remain competitive.

The cloud computing market is currently dominated by Amazon (AMZN - Free Report) through its Amazon Web Services. We note that the fight for the #2 place is intensifying owing to the growing presence of Microsoft (MSFT - Free Report) , Alphabet (GOOGL - Free Report) , salesforce.com and Oracle. This has affected IBM’s gross margin in the last couple of years.

We note that gross margin in 2016 contracted 190 basis points (bps) over 2015. In the recently concluded quarter, non-GAAP gross margin contracted a massive 300 basis points (bps) from the year-ago quarter.

Newer Techs Still in Nascent Stage

Although IBM has been expanding product portfolio into newer technologies like Blockchain, Quantum computing and Containers through frequent acquisitions, we believe that these are still in nascent stage and will take some time to contribute meaningfully towards top-line growth.

Moreover, sluggish IT spending is a concern for IBM. Gartner in its latest report projects IT spending to increase 1.4% over 2016 to $3.5 trillion in 2017. The figure is much lower than earlier projection of 2.7% growth.

Although estimated improvement in data center spending is good for IBM, slowing spending on enterprise software and IT services are huge concerns.

Alternative Picks

Currently, IBM has a Growth Style Score of ‘D’ and a Zacks Rank #3 (Hold). Back-tested results show that stocks with Growth Style Scores of ‘A’ or ‘B,’ when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) handily outperform other stocks. You can see the complete list of today’s Zacks #1 Rank stocks here.

Here, we pick four technology stocks that not only sports a Growth score of “A” and a Zacks Rank #1 but also better year-to-date price appreciation.

Momo Inc. (MOMO - Free Report) is a leading social-media company in China. Current year EPS estimate has increased 7.1% to $1.20 in the last 60 days.

  • Year-to-date Return: 100%
  • Average four-quarter Surprise: 6.99%


Applied Optoelectronics Inc. (AAOI - Free Report) designs, develops and manufactures advanced optical devices. Current year EPS estimate has soared 111.2% to $3.76 in the last 60 days.

  • Year-to-date Return: 88.6%
  • Average four-quarter Surprise: 116.49%


Extreme Networks Inc. (EXTR - Free Report) offers software-driven networking solutions. Current year EPS estimate has increased 9.1% to 24 cents in the last 60 days.

  • Year-to-date Return: 44.6%
  • Average four-quarter Surprise: 104.17%


AU Optronics Corp. (AUO - Free Report) is a world-leading manufacturer of large-size thin film transistor liquid crystal display panels. Current year EPS estimate has increased 1.7% to $1.17 in the last 60 days.

  • Year-to-date Return: 18.4%
  • Average four-quarter Surprise: 25.00%

 

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