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Cloud Revenues Dominate IBM’s Q4 Earnings

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IBM (NYSE:IBM) stock rose around 4.72% in the pre-market trading session today at 7:29 AM ET. The company posted better-than-expected fourth-quarter results on Tuesday. IBM beats analysts’ revenue and earnings estimates in the fourth quarter.

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IBM’s fourth-quarter performance

IBM reported an adjusted EPS of $4.71 in the fourth quarter. The earnings beat analysts’ estimates by $0.02 per share. Plus, the revenues of $21.78 billion beat analysts’ estimates of $21.64 billion.

The revenues in the fourth quarter rose about 0.08% YoY (year-over-year). IBM’s biggest segment, global technology services fell 4.8% YoY, while the systems segment’s revenue rose 16.1% YoY. The global business services segment’s revenue fell 0.6% YoY in the fourth quarter. Meanwhile, the cloud segment did well in the fourth quarter. The cloud & cognitive software revenues gained 8.7% YoY in the fourth quarter.

In the fourth quarter, the Red Hat revenue grew 24% YoY. In July 2019, IBM acquired the Red Hat business for $34 billion. Read IBM Acquires Red Hat: Reiterates Blockchain and AI Ambitions to learn more.

Guidance for 2020

IBM expects its 2020 non-GAAP earnings to be at least $13.35 per share. The company also expects to generate free cash flows of around $12.5 billion.

Analysts expect an adjusted EPS of $13.33 in 2020—up more than 4% YoY. The adjusted EPS will likely rise by 7.1% in 2021 to $14.27 per share. Analysts expect IBM’s revenues to rise by 2.8% in 2020 to $79.3 billion. The sales will likely rise by 1.7% in 2021 to $80.7 billion.

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According to a MarketWatch report, Ginni Rometty, IBM’s chairman and CEO, said, “Looking ahead, this positions us for sustained revenue growth in 2020 as we continue to help our clients shift their mission-critical workloads to the hybrid cloud and scale their efforts to become a cognitive enterprise.”

Analysts’ recommendations

Among the 21 analysts tracking IBM stock, five recommend a “buy”—down from seven in the last month. About 14 analysts recommend a “hold”—up from 13 in the previous month. Meanwhile, two analysts recommend a “sell”—unchanged from the last month. According to analysts’ consensus, the stock has a 12-month mean target price of $148.05. The average target price is at a 6.4% premium to the current stock price. The median target was $145.00 on the same date.

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Today, Citi analyst Jim Suva maintained his “neutral” rating on IBM stock and raised his price estimate to $155 from $140. The revised target price implies an 11.4% upside for the stock. According to TheFly, “IBM trends are improving, says the analyst, who looks to see if the company can improve its signings to show positive growth which he notes that on a rolling four quarter basis continues to be negative.”

J.P. Morgan raised its target price estimate on IBM stock to $154 from $152. Morgan Stanley also raised its target price estimate on the stock to $164 from $155.

IBM stock’s price movement

IBM stock closed 0.62% higher on Tuesday and stood at $139.17. At the closing price, the company’s market cap is about $123.3 billion. The stock is trading 9.0% lower than its 52-week high of $152.95 and 9.7% higher than its 52-week low of $126.85. IBM has gained 12.4% in the last 12 months. In comparison, Oracle (NASDAQ:ORCL) and Microsoft (NASDAQ:MSFT) have gained 12.1% and 54.6% in the last 12 months, respectively.

Based on the closing price on Tuesday, IBM stock was trading 2.5% above its 20-day moving average of $135.72. The stock is also trading 3.2% above its 50-day moving average of $134.88 and 1.5% above its 100-day moving average of $137.16.

IBM’s 14-day RSI (relative strength index) score is 67. The score shows that the stock is trading near the “overbought” level. IBM’s upper, middle, and lower Bollinger Band levels are $138.79, $135.72, and $132.65, respectively. On Tuesday, the stock closed near its upper Bollinger Band level, which suggested that it’s overbought.

In the fourth quarter, IBM’s free cash flow fell 6.7% YoY to $6.03 billion. The company’s operating cash flow also fell by 16.2% YoY to $3.45 billion. IBM’s capital expenditures fell 26.5% YoY to $645 million in the fourth quarter. In the fourth quarter, the company returned $1.4 billion to shareholders in the form of dividends. On Tuesday, the company’s dividend yield was 4.66%.

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