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IBM: Back on the Descent After Weak Quarter
Stock Analysis & Ideas

IBM: Back on the Descent After Weak Quarter

IBM (IBM) stock can’t seem to catch a break, with shares back on the retreat following the release of some pretty underwhelming quarterly numbers. The company barely beat on the bottom line while coming up short on the top line.

IBM is an old-school technology company that has appealed to the value crowd. After the latest pullback, shares of IBM trade at just 1.5 times sales, making it one of the “cheapest” tech giants in the U.S. market.

Still, the stock doesn’t look very undervalued when considering the amount of baggage that could continue weighing its stock for quarters, if not years to come.

For that reason, I remain neutral on the stock. I wouldn’t buy for the risk of being left holding the bag. At the same time, I wouldn’t short it, as it’s far likelier to consolidate over a prolonged period of time, as management explores endeavors to break the long-term downtrend. (See Analysts’ Top Stocks on TipRanks)

Spinning Off One’s Way to Growth?

Big-time value investor Warren Buffett had thrown in the towel on IBM stock years ago. This was a wise move as shares of IBM have continued to stumble with businesses like Kyndryl, which is about to be spun off. Indeed, IBM isn’t the only long-time company that’s been ditching its slower-growth assets to reinvigorate and reinvent itself.

Pharmaceutical company Pfizer (PFE) did the same with its off-patent business, which was spun off as Viatris (VTRS).

The move eventually paid off for Pfizer, which is now arguably a much more innovative company, with a robust drug pipeline and the mRNA vaccine Comirnaty. However, I’m not so sure ditching laggard segments will propel IBM stock out of its multi-year funk.

Unlike Pfizer and its breakthrough mRNA technology that paved the way for the COVID-19 vaccine, IBM doesn’t have much to get investors genuinely excited about. All that investors likely see is long-term fundamental decay that needs to be addressed.

Revenue Miss in the Third Quarter

For Q3 2021, revenue of $17.6 billion came in lower than expected, thanks in part to underwhelming software sales. The stock responded with a 5% plunge despite the encouraging strategic update that preceded the earnings reveal.

Indeed, management has been throwing around some exciting terms, including AI and cloud computing. Still, it’s tough to keep up with the competition, which is taking off at an incredible rate. With sluggish software sales, it’s clear that the current trend is no friend to IBM, as shareholders look for results and evidence of a significant turnaround.

Unfortunately, it’s tough to turn a $112 billion ship around, especially with the hefty dividend commitment. The 5.3% yield is very compelling for investors, but unfortunately, every dollar paid to investors is a dollar not invested in cutting-edge technology that can help turn the IBM ship around.

For now, I’m not convinced that IBM can rise out of its rut. As such, investors should ensure careful due diligence before picking up shares at these depths, as the value to be had in the name may not be as it seems.

Wall Street’s Take

Turning to Wall Street, IBM has a Moderate Buy consensus rating, based on five Buys and three Holds assigned in the past three months. The average IBM price target of $162.13 implies 29.6% upside potential.

Analyst price targets range from a low of $150.00 per share to a high of $172.00 per share.

Disclosure: Joey Frenette owned shares of Pfizer at the time of publication.

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