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Why IBM Stock Is Soaring Despite Slumping Revenue

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IBM’s (IBM - Free Report) shares climbed over 9.5% on Wednesday, one day after the company reported third-quarter earnings that topped expectations, as investors hope that its new business segments might finally help turn around the lagging giant.

The information technology power beat both earnings and revenue projections on Tuesday. Still, despite posting $19.15 billion in revenues, IBM’s year-over-year sales fell for the 22nd quarter in a row. Slumping demand for the company’s now old school software and hardware segments dragged down revenues (also read: IBM Stock Pops On Q3 Cloud Revenue Growth).

Although overall IBM revenues dipped slightly and profits sunk by 4.5%, investors showed signs of renewed faith in the company based on the firm’s ability to expand its new divisions—including cloud computing and artificial intelligence. 

IBM has started to bolster its pay-as-you-go internet-based services, its highly visible Watson AI platform, cloud computing offerings, and more future looking offerings. In turn, the company’s “strategic imperatives” revenues rose 10% in the third-quarter and now account for 45% of total IBM revenues.

Big Blue’s cloud revenues soared 20% in the quarter to hit $4.1 billion. This brings the company’s vitally important cloud computing revenues to $15.8 billion over the last 12 months. The firm’s analytics revenues gained 5%, while mobile sales grew 7%. On top of these gains, IBM’s security sector revenues jumped 51%.

“We said we’d have a better second half than first, and we did a bit better on the revenue line,” IBM CFO Martin Schroeter said in an interview. “We’re well positioned to deliver exactly what we said in the fourth quarter.”

For its full-year, IBM projects to post diluted, non-GAAP earnings of at least $13.80 per share, and the company reaffirmed its flat free cash flow projection.

Shares of IBM had fallen over 11% for the year. But in the last 4 weeks, the company has seen its stock price gain 1.49%. With Wednesday’s surge, IBM stock now sits at roughly $160 per share.

Bottom Line

Even with today’s gains of over 9%, IBM stock rests 12% below its 52-week high. The company is currently a Zacks Rank #3 (Hold) and sports an “A” grade for Value in our Style Scores system.

For now, it seems investors are buying IBM at a relatively low price based on a hope that it can finally effectively transition more of its business into modern technologies that might carry the company into the future.

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