IBM Shares Slump as Quarterly Revenue Disappoints

Armonk, New York-based technology company, IBM’s shares slumped about 8% in pre-market trading on Friday after the computer firm missed market expectations for quarterly revenue in the fourth quarter of 2020.

The world’s largest computer firm said its total revenue declined 6.5% to $20.37 billion, lower than the market expectations of $20.67 billion. However, the computer firm reported an adjusted EPS of $2.07 per share, higher than the Wall Street estimate of $1.81.

“IBM reported fourth-quarter results that beat CapIQ earnings consensus expectations–but top-line performance weighed on overall results, as the company’s revenue came behind CapIQ consensus estimates.  While we forecast are turn to top-line growth for IBM in the upcoming fiscal year, a meager annual growth of 1% year over year is the extent we expect.

“IBM’s largest and worst-performing segment, global technology services are still expected to be spun off by the end of fiscal 2021. We continue to believe this spin-off will only improve IBM’s remaining business in optics–as the separation should expose IBM’s other segments’ better growth and profitability profiles. We are maintaining our fair value estimate of $125 per share for the narrow-moat name, which leaves shares fairly valued, in our view.”

IBM forecasts to grow revenue for the full year 2021 based on the current foreign exchange rates. The adjusted free cash flow of $11 billion to $12 billion in 2021. The company expects adjusted free cash flow excludes nearly $3 billion of cash impacts from the company’s structural actions initiated in the fourth quarter of 2020 and the transaction costs associated with the separation of the managed infrastructure services business, the company added in the statement.

IBM shares plunged about 8% to $21.17 in pre-market trading on Friday. However, the stock fell 6% in 2020.

IBM Stock Price Forecast

Eighteen analysts forecast the average price in 12 months at $139. The average price target represents a 5.6% increase from the last price of $131.65. From those 18 analysts, one rated “Buy”, 11 rated “Hold” and six rated “Sell”, according to Marketbeat.

Morgan Stanley gave a base target price of $140 with a high of $189 under a bull scenario and $79 under the worst-case scenario. The firm currently has an “Equal-weight” rating on the computer firm’s stock.

“We remain on the sidelines as spin transactions don’t outperform until post-close, IBM is a late-cycle play, and mainframe comps are difficult. The 4Q software miss follows deteriorating proforma growth since the RHT acquisition and needs to reverse before the stock can work,” said Katy Huberty, equity analyst at Morgan Stanley.

Several other analysts have also recently commented on the stock. Zacks Investment Research lowered International Business Machines to a “sell” rating from a “hold” rating and set a $124 target price. BMO Capital Markets lowered their target price to $138 from $140 and set a “market perform” rating. ValuEngine upgraded to a “hold” rating from a “sell”.

Analyst Comments

“The spin of Infrastructure Services is a step in the right direction to drive sustainable revenue growth, but we expect 2021 to be a challenging transition year for IBM. Near-term, we expect IBM to be pressured by greater recurring revenue mix vs. peers as IT spending recovers, tough mainframe compares in 1H21, and the fact that spin transactions historically don’t outperform until post-close,” Morgan Stanley’s Huberty added.

“Results from our AlphaWise CIO surveys also point to lower spending intentions with IBM despite the Red Hat deal. Despite valuation below Services and Software comps, near-term macro factors and lack of conviction around IBM’s ability to stabilize revenue in the medium/long-term keep us Equal-weight.”

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