IBM Stock Fell Due to Revenue Miss: What’s Next?

IBM (IBM) stock fell more than 5% in after-hours trading. The company reported mixed third-quarter results on Wednesday. IBM beat the earnings estimates but missed the revenue numbers in the third quarter. The weak results also impacted the broader equity markets on Wednesday. The Dow Jones, the S&P 500, and the Nasdaq Composite fell 0.08%, 0.2%, and 0.3%, respectively. Netflix (NFLX) also reported its earnings results. The stock gained as much as 9.9% in extended trading following its third-quarter earnings beat.

IBM stock’s price movement

IBM stock closed 0.62% lower on Wednesday and stood at $142.11. At the closing price, IBM’s market capitalization is around $125.9 billion. The stock is trading 7.1% lower than its 52-week high of $152.95 and 34.1% higher than its 52-week low of $105.94.

IBM has gained 29.5% year-to-date. In comparison, Symantec (SYMC), Oracle (ORCL), and Microsoft (MSFT) have gained 25.3%, 25.3%, and 39.8%, respectively.

IBM’s third-quarter performance

IBM reported an EPS of $2.68 in the third quarter. The earnings beat analysts’ estimates by $0.01 per share. However, the revenues of $18.03 billion lagged analysts’ estimates of $18.22 per share.

Notably, IBM hasn’t been performing well in the past few quarters. The company’s sales have fallen for five consecutive quarters. The revenues in the third quarter fell about 4% YoY. Lower sales in the services, hardware, and financing businesses pulled down the overall sales. IBM’s biggest segment, Global Technology Services, fell 5.6% YoY, while the Systems revenues fell 14.7% YoY. The Global Business Services segment’s revenues rose 1% YoY in the third quarter.

Meanwhile, the cloud business did well in the third quarter. Cloud revenues gained 11% YoY in the third quarter. The Red Hat business, which was acquired in July for $34 billion, also added 20% YoY to the total revenues.

Guidance for 2019

IBM lowered its earnings estimate for 2019. The company included the impact of the Red Hat acquisition. IBM expects its 2019 earnings to be at least $12.80 per share. Analysts expected earnings of $12.81 in 2019—down more than 7% YoY. The earnings will likely rise 4.6% in 2020 to $13.38 per share.

Analysts expect IBM’s revenues to fall 2.6% in 2019 to $77.5 billion. The sales will likely rise 3.7% in 2020 to $80.4 billion.

According to Evercore ISI analyst Amit Daryanani, “the combination of new products should enable the company’s Systems segment to revert to growth in CY20 following recent decline.”

Analysts’ recommendations

Among the 23 analysts covering IBM stock, eight recommend a “buy” rating on the stock—unchanged from the last month. About 13 analysts have a “hold” rating on the stock—unchanged from last month. Two analysts have a “sell” rating on the stock—unchanged from the previous month. Currently, analysts have given IBM stock a 12-month target price of $151.7. The average target price is at a 6.7% premium to the current stock price. The median target was $154.00 on the same date.