International Business Machines Corp. shares endured their worst day in more than five years Wednesday, closing at prices not seen since early 2016 as investors appeared to grow impatient with the pace of the tech giant’s growth in new businesses after it snapped a short-lived revenue growth streak.
shares dropped 7.6% to close at $134.05, after touching an intraday low of $133.42, for the stock’s worst one-day performance since April 19, 2013, when shares fell 8.3%. Also, IBM’s stock closed at its lowest price since Feb. 29, 2016.
IBM shares were the worst performer on both the Dow Jones Industrial Average
and the S&P 500 index
on Wednesday. The Dow closed down 0.4%, while both the S&P 500 and the tech-heavy Nasdaq Composite Index
finished down less than 0.1%.
Late Wednesday, IBM reported adjusted third-quarter earnings that topped Wall Street estimates, but more glaring in the report were revenue misses in segments that are intended to wean Big Blue from its legacy mainframe business.
Of the 24 analysts who cover IBM, opinion was split but tilted toward the negative, as five analysts cut their price targets and two raised them, resulting in an average price target of $161.66, according to FactSet. With one analyst downgrading the stock to a hold, nine analysts now have buy or overweight ratings, 12 have hold ratings and three have sell ratings.
Third-quarter revenue declined to $18.76 billion from $19.15 billion in the year-ago period, snapping a two-quarter streak of revenue gains that had ended a streak of 23 quarters where revenue had fallen.
Cognitive solutions, which includes Watson AI, was one of IBM’s poorest-performing segments for the quarter. The unit’s revenue fell 6% to $4.1 billion from the year-ago quarter, while analysts had expected a revenue decline of 2% to $4.31 billion.
Technology services and cloud-platform, which includes IBM Cloud, posted revenue that was flat compared with the year before at $8.3 billion, while analysts expected $8.43 billion.
Moffett Nathanson analyst Lisa Ellis, who has a sell rating and a $140 price target on IBM, said the company has an “anchor” problem, when it comes to its transformation. While cloud and AI are the future and the way to go, they’re not growing fast enough to fill the void of legacy tech.
“IBM still has ~40% of revenues in areas of Enterprise IT that are in long-term structural decline – areas including on-premise software, datacenter outsourcing, and hardware support,” Ellis said in a note. “While IBM may be able to slow the declines in these businesses, they can’t be reversed – those segments of the industry will, over time, go away. Worse still – these businesses are highly profitable, contributing an estimated ~50% of IBM’s profits.”
For IBM “as long as the ‘anchor’ is still large (and currently, it is still far larger than the growth areas), IBM’s turnaround, and the company’s ability to achieve its long-term objective of high single-digit EPS growth – will remain protracted and uncertain,” Ellis said.
Stifel analyst David Grossman, who has a buy rating and a $178 price target on IBM, in a note entitled “Some Good, Some Bad, Some In-Line; Another Typical IBM Quarter,” said the company’s cognitive solutions segment is the most difficult to project.
“If there was a surprise in the quarter it was the incremental deceleration of the Cognitive segment,” Grossman said. “Cognitive (22% of revenue, down 5% cc) includes most of IBM’s software assets and while management warned of incremental weakness in 3Q following over a 1% decline in 2Q, the incremental erosion was greater than anticipated.”
Wedbush analyst Moshe Katri, who has a neutral rating on IBM and a $185 price target, said growth consistency and acceleration are inconsistent with cognitive and cloud, and called profitability performance “unconvincing.”
Katri said he thinks IBM will only start generating a significant return to shareholders if the company undertakes “the difficult path of aggressively terminating/restructuring underperforming units, hence, sacrificing top-line growth for generating margin/FCF improvements.”
“As is, IBM’s portfolio of commoditized, legacy “tech” products and services will continue to cap the performance of the entire operation,” Katri said.
UBS analyst John Roy, who has a buy rating and a $180 price target, said “the company is talking up green shoots, but investors wanted revenue growth now.”
“AI and analytics have begun to help IBM improve its operations; the next phase will be to help sales,” Roy said. “We would be buyers here as these operational fixes will likely stay with the business units and the upside from bottoming revenue should start to work, particularly given the negative sentiment around IBM and the stock.”
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