What To Expect From IBM Stock In 2015

  • IBM Earnings for Q4 2014 was a mixed bag with the company missing out on revenue estimates for the fourth quarter in a row.
  • The company's foray into new business like Apple-IBM partnership should start showing positive results in 2015.
  • IBM revenue will decline in the short term due to the constant revenue fall in core areas.

IBM (NYSE:IBM) earnings for the fourth quarter were released on January 22, 2015. On one hand the net income saw a dramatic fall of over 11% and on the other hand the company also showed some positive developments in new business areas like the Apple IBM partnership, cloud, mobile and more. IBM revenue fell by a whopping 12% but adjusted for the divestures and currency movements the revenues fell by a modest 2%. The businesses classified as Strategic Imperatives by IBM including analytics, social, mobile, security and cloud actually showed a good growth of 16% in 2014.

IBM Q4 2014 Earnings - A Mixed Bag

Fig: IBM Q4 Earnings - IBM Revenue from main business segments (in billion USD)

IBM is in a major transition phase where it will go on moving out of lower margin businesses and seeking stronger growth from higher value businesses. The problem is that moving a colossal ship like IBM with over 430,000 employees is not an easy task. No matter how astute the captain is or how good the overall engineering of the ship is there is bound to be anxiety among the passengers at the sight of every iceberg.

Currently the passengers or the investors of IBM stock have been tolerant towards the company. After bungling up with its Roadmap 2015 in which it was looking to provide an EPS of $20 per share by 2015, IBM stock lost around 17% of its value in 2014. However this also points to the inherent strength of the company where any other firm showing similar results would have lost its bottom, IBM showed a much more resilient picture. It owes this to its business model which still shows a $128 billion in service backlog. IBM stock analysis shows that even though revenue has been more or less stagnant for the past decade, IBM earnings have increased on the back of increasing margins.

IBM Stock Performance In 2014

IBM stock chart
Source: IBM stock chart by Amigobulls

The IBM stock lost 13% in 2014 as can be seen in the 1 year IBM stock chart above. The year 2014 was a year of major changes for IBM. It undertook divestures like the sale of x86 server business to Lenovo and sale of a chip manufacturing unit to Globalfoundries Inc. These businesses were very low margin businesses which provided few positive synergies. This led to a rise in the operating margin from 25.9% in Q4 2013 to 29.4% in Q4 2014. Another major headwind for IBM which led to lower revenue realization was the currency movements. 2014 saw a huge increase in dollar and the overall dollar index which weighs the dollar against other major currencies rose by 13%. A major part of IBM’s earnings come from international locations which caused lower revenue in dollar terms.

IBM’s revenue in each segment is shown below. Adjusted growth shows the final change after adjusting for divestures and currency movements:

Segment Revenue (Billions) Growth (Reported) Growth (Adjusted)
Global Technology Services $9.2 (8%) 2%
Global Business Services $4.3 (8%) (3%)
Software $7.6 (7%) (3%)
Systems and Technology $2.4 (39%) (12%)
Global Financing $0.5 0% 5%
Total $24.1 (12%) (2%)

Source: IBM

Its Strategic Imperatives businesses which brought in a total of $25 billion or 27% of IBM’s revenues saw double digit growth led by Mobile which showed 200% growth, Cloud showing 60%, Security 19% and Analytics showing 7% growth. These positive developments are overshadowed by the fact that it still has a bulk of its businesses coming from segments which are facing heavy commoditization and which are slowly declining. The IBM stock price has consequently decreased on the back of these declining IBM earnings.

IBM Revenue Will Decrease In The Short-Term

An increasing consensus within the financial community as voiced by UBS analyst Steven Mulunovich is that IBM might not be able to stem this decrease in the revenues in the short term due to the constant revenue fall in its bread and butter businesses. He pointed out that IBM is underestimating the decline it will face in these businesses in the short term which make up over two thirds of their entire portfolio.

IBM has been forthright about the hurdles it faces in the short term and has given a bleak forecast for 2015 giving a range of $15.75 to $16.50 per share of EPS. Even the higher end fell short of analyst expectation of $16.59 EPS. This led to a correction of 3% in IBM share prices. As mentioned before it will be an onerous task for any management to navigate such a gargantuan organization facing increasing cost pressures and trying to get a foothold in newer business areas.

Many investors are asking the question whether the IBM stock is a value stock or not. Looking at the data it looks like we will have to wait a couple of quarters before positive numbers are seen. Till that time IBM will face decreasing revenues and income with a corresponding decrease in market valuation.

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