Shares of International Business Machines Corp. rose on Tuesday after the company beat expectations for the June quarter, but analysts did not give the company too much credit for clearing a low level.
Mused Moffett, Nathanson analyst, Lisa Ellis: “We are still working to achieve the correct semantics: when companies exceed the previously cut estimates, is that ‘better than’ expectations? Or ‘less bad than’? Or ‘not as bad as’?
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She wrote that open source software developer Red Hat saw “solid” growth in the quarter, but regretted that other high-margin areas of business did not perform as well.
IBM IBM,
The shares touched an intraday high of $ 132.17 on Tuesday and rose 0.7% to $ 127.26. In comparison, the DIA Jones Industrial Average DJIA,
which includes IBM as a component, it was up 1.2%, the S&P 500 index was up 0.5% and the Nasdaq high-tech composite index was down 0.5%.
IBM’s cloud and cognitive software division contributes about a third of revenue, but two-thirds of pre-tax revenue, Ellis said. This division includes Red Hat, broader cloud software, and digital software solutions, but outside Red Hat, the results weren’t too enthusiastic as cognitive applications declined 8% from a year earlier, while cloud platforms and data, excluding Red Hat, fell as 10%.
“While some weakness in revenue is expected from a pandemic, these results do not bode well for IBM’s earnings outlook and Cloud + Digital / AI strategy,” wrote Ellis, who maintained a sales rating and price. $ 115 target on a note titled: “Shaking the pandemic very well, but I kind of wish the really profitable and important things were a little better.”
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Morgan Stanley analyst Katy Huberty, who has an equal-weight rating and a price target of $ 128, said the quarter was “better than previously feared,” but she expects a slow recovery in the second half of the year.
“While IBM saw some improvement in demand trends for software and [global business services] At the end of the June quarter, business still did not grow Y / Y in June and the lack of visibility around the virus case curve translated into another quarter with no year-round guidance, ”said Huberty.
In April, IBM withdrew its full-year earnings guide of “at least $ 13.35” per share, and said Monday it was still withholding it due to the economic uncertainty created by the COVID-19 pandemic.
Analysts surveyed by FactSet expect full-year earnings on average of $ 10.97 per share, down from the $ 11.06 per share expected before the earnings report.
Wedbush analyst Moshe Katri put “rhythm” in quotes when talking about IBM’s last quarter, writing that the company’s results were better than expected, but that IBM still saw a 20% annual drop in reserves and a quarterly slowdown in Red Hat growth.
“In our view, a potential acceleration / expansion in IBM’s digital-based revenue base (representing a larger portion of the annual execution rate) could provide a significant catalyst for IBM’s new rating,” he wrote. “At this time, we do not believe that IBM has reached this tipping point.”
Katri has a neutral rating and a $ 140 price target on the shares.
Even Stifel’s David Grossman, an IBM bull, said the results were “in line” and noted that the stock’s shares will rise from 3% to 4% on Monday “may [have] reflect[ed] higher than usual short position and relatively low expectations ”for the quarter.
“The overall demand cadence improved month-to-month over the course of the quarter, but June was still relatively weak and visibility remains low (40% of transaction / volume-based revenue),” he wrote, while maintaining a purchase rating and a target price of $ 147.
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Citi Research analyst Jim Suva was impressed with “good and clean results from IBM that did not include large abnormal tax benefits, IP increases, or one-time earnings”, although he still found reason to be cautious.
“Our reservation is that IBM signings are down 14% off easy comps and an order book is down -1%, along with continued negative sales growth in many company segments outside of the cloud and acquired Red Hat, “wrote Suva. It maintained its neutral rating on the shares, but raised its target price to $ 140 from $ 120.
At least seven analysts raised their IBM stock price targets after the report, according to FactSet. Of the 18 analysts tracked by FactSet covering IBM shares, three have buy ratings, 13 have hold ratings, and two have sell ratings, with an average price target of $ 132.27.
IBM shares have gained 9% in the past three months as the Dow has risen 17%.
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