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Can IBM Make a Comeback in 2018 After an Unimpressive 2017?
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The technology sector has been one of the best performing sectors this year so far. However, not all the companies have fared that well. International Business Machines Corp. (IBM - Free Report) is one of them.
IBM has been witnessing a year-over-year decline in its top-line over the last several quarters. The inconsistent revenue growth trajectory, slow transition to cloud, increasing competition and sluggish IT spending have been the major reasons behind the company’s dismal performance.
So far this year, IBM has lost 8.5% against Technology Select Sector SPDR ETF (XLK - Free Report) gain of 32.3%.
What’s Hurting the Company?
IBM is under tremendous pressure due to its time consuming business model transition, which is negatively impacting results. Despite significant investments, the company is yet to gain a dominant position in the Infrastructure as a Service (IaaS), Platform as a Service (PaaS) and Hosted private cloud market. Intensifying competition in most of the markets is a major concern for the company.
Contrary to expectations IBM’s focus on becoming a major force in the Artificial Intelligence (AI) market with Watson has failed – at least in the near term.
Moreover, IBM’s continuing investments and pricing pressure related to its legacy hardware business is a concern. We believe the underperforming legacy business segments will remain an overhang on the company’s bottom line till the business model transition, which is heavily time-consuming, is completed.
Although the company is undertaking a number of initiatives to counter the aforementioned challenges, its impact on quarterly results has not been significant.
We believe that IBM’s significant investments in “Strategic Imperatives” – cloud computing, mobile, cognitive technologies and AI – will take some more time to deliver credible top-line growth.
IBM has also undertaken a number of blockchain initiatives to grab the growth opportunity in the industry. However, all the efforts are at a very nascent stage and will take time to contribute meaningfully to top-line growth. This is a significant headwind in our view.
Moreover, Warren Buffett led conglomerate Berkshire Hathaway Inc.’s, the company’s largest shareholder, lowering of shares in IBM by 32% to 37 million in May raised concerns among investors and impacted the share price movement.
We know that Buffett is a value investor as he mostly considers the intrinsic value (fair value of a stock calculated by its future earnings power) of a stock for making investment. His investment apart from value also includes understanding of the business, competitive advantages and capable management. Thus, the loss of Buffett’s confidence doesn’t bode well for the company.
We believe that the company’s turnaround efforts will yield results in the long run though its impact on near-term results will likely remain muted.
Long-term earnings growth rate for IPG Photonics, NetApp and NVIDIA is projected to be 12%, 11.3% and 10.3%, respectively.
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Can IBM Make a Comeback in 2018 After an Unimpressive 2017?
The technology sector has been one of the best performing sectors this year so far. However, not all the companies have fared that well. International Business Machines Corp. (IBM - Free Report) is one of them.
IBM has been witnessing a year-over-year decline in its top-line over the last several quarters. The inconsistent revenue growth trajectory, slow transition to cloud, increasing competition and sluggish IT spending have been the major reasons behind the company’s dismal performance.
So far this year, IBM has lost 8.5% against Technology Select Sector SPDR ETF (XLK - Free Report) gain of 32.3%.
What’s Hurting the Company?
IBM is under tremendous pressure due to its time consuming business model transition, which is negatively impacting results. Despite significant investments, the company is yet to gain a dominant position in the Infrastructure as a Service (IaaS), Platform as a Service (PaaS) and Hosted private cloud market. Intensifying competition in most of the markets is a major concern for the company.
Contrary to expectations IBM’s focus on becoming a major force in the Artificial Intelligence (AI) market with Watson has failed – at least in the near term.
Moreover, IBM’s continuing investments and pricing pressure related to its legacy hardware business is a concern. We believe the underperforming legacy business segments will remain an overhang on the company’s bottom line till the business model transition, which is heavily time-consuming, is completed.
IBM Corporation Revenue (TTM)
International Business Machines Corporation Revenue (TTM) | International Business Machines Corporation Quote
Is Any Turnaround Possible in the Near Term?
Although the company is undertaking a number of initiatives to counter the aforementioned challenges, its impact on quarterly results has not been significant.
We believe that IBM’s significant investments in “Strategic Imperatives” – cloud computing, mobile, cognitive technologies and AI – will take some more time to deliver credible top-line growth.
IBM has also undertaken a number of blockchain initiatives to grab the growth opportunity in the industry. However, all the efforts are at a very nascent stage and will take time to contribute meaningfully to top-line growth. This is a significant headwind in our view.
Moreover, Warren Buffett led conglomerate Berkshire Hathaway Inc.’s, the company’s largest shareholder, lowering of shares in IBM by 32% to 37 million in May raised concerns among investors and impacted the share price movement.
(Looking for the Best Stocks for 2018? Be among the first to see our Top Ten Stocks for 2018 portfolio here.)
We know that Buffett is a value investor as he mostly considers the intrinsic value (fair value of a stock calculated by its future earnings power) of a stock for making investment. His investment apart from value also includes understanding of the business, competitive advantages and capable management. Thus, the loss of Buffett’s confidence doesn’t bode well for the company.
We believe that the company’s turnaround efforts will yield results in the long run though its impact on near-term results will likely remain muted.
Zacks Rank & Stocks to Consider
IBM carries a Zacks Rank #4 (Sell).
Some better-ranked stocks in the broader technology sector include IPG Photonics Corp. (IPGP - Free Report) , NetApp Inc. (NTAP - Free Report) and NVIDIA Corp. (NVDA - Free Report) , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.
Long-term earnings growth rate for IPG Photonics, NetApp and NVIDIA is projected to be 12%, 11.3% and 10.3%, respectively.
Zacks’ Best Private Investment Ideas
While we are happy to share many articles like this on the website, our best recommendations and most in-depth research are not available to the public.
Starting today, for the next month, you can follow all Zacks' private buys and sells in real time. Our experts cover all kinds of trades… from value to momentum . . . from stocks under $10 to ETF and option moves . . . from stocks that corporate insiders are buying up to companies that are about to report positive earnings surprises. You can even look inside exclusive portfolios that are normally closed to new investors.
Click here for Zacks' private trades >>