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Behind IBM’s Stock Reaction to Its Latest Quarterly Results

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IBM shares fell 8% in April 2017

Tech (QQQ) heavyweight IBM (IBM) saw its shares fall 8.2% in April 2017 after the firm reported its 1Q17 results. IBM reported revenue of $18.2 billion for 1Q17—slightly below the analyst estimate of $18.5 billion. IBM reported non-GAAP (generally accepted accounting principles) EPS (earnings per share) of $2.38, as compared to analyst estimate of $2.34. IBM’s revenue fell 2% YoY in fiscal 1Q17.

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Another quarter of revenue decline

IBM’s revenue fell 2% YoY in fiscal 2Q17, which makes the fifth consecutive year wherein IBM has reported a YoY (year-over-year) revenue fall—the 20th quarter in a row of top-line decline.

Last year, IBM continued its strategy of acquisitions and partnerships in an effort to post growth in the cloud space. But so far, the growth hasn’t come.

Morgan Stanley optimistic about IBM

Morgan Stanley (MS) analyst Katy Huberty believes that the market has underappreciated IBM’s growth potential and its initiatives toward the analytics and cloud businesses. In March 2017, Huberty stated that while investors continue to back Amazon.com (AMZN) and Microsoft (MSFT) in the cloud segment, IBM is a special case.

Huberty also stated that IBM is currently undervalued, reporting the following: “IBM’s cloud undervalued…raising PT to $212. IBM is transforming to a cloud platform as we expect its $3B public cloud business to grow at a 33% 16–20 CAGR [compound annual growth rate], with gross and operating margins expanding to industry average by 2020.”

The cloud now dominates the enterprise software space, and it’s growing rapidly. However, despite several initiatives, IBM and Oracle (ORCL) are finding it difficult to report growth. Meanwhile, Salesforce.com (CRM) keeps posting double-digit growth.

In the next part, we’ll discuss Blackberry.

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