Wall Street Reacts To IBM's Q4 Report

Shares of International Business Machines Corp. IBM were trading lower by more than 4 percent Friday afternoon despite ending a 23-quarter streak of declining revenue in its fourth-quarter results. Here's what some of Wall Street's top analysts are saying after the print.

Bernstein: 'Weak' Quarter

IBM's fourth-quarter results were "weak," including a 30-cent EPS miss — excluding the tailwind of a lower-than-expected tax rate of 6 percent versus 15 percent — and revenue growth at a constant currency basis in just one unit, hardware, Bernstein's Toni Sacconaghi, Jr. said in a research report.

The services unit experienced a "dramatic" 400-basis-point erosion in margins on a year-over-year basis, the analyst said. 

IBM also guided its fiscal 2018 EPS to be at least $13.80, which is "next to impossible" to achieve given its guided tax rate of 16 percent plus or minus 2 percent, Sacconaghi said. The company's normalized long-term tax rate will likely prove to be higher, adding another headwind to the longer-term story, he said. 

Bernstein maintains a Market Perform rating on IBM's stock with an unchanged $150 price target.

Morgan Stanley: Inflection Year Ahead

IBM still has "more work to do" on the margin front to build investor confidence, Morgan Stanley's Katy Huberty said in a research report. But 2018 could prove to be an inflection year for the following reasons, the analyst said: 

Expectations for 2.2-percent revenue growth versus a prior estimate of negative 0.3 percent.

2.5-percent gross profit dollar growth versus a prior estimate of 1 percent.

IBM "leads the conversation" in areas like AI, blockchain and quantum computing. 

Expectations for a "larger than normal" number of enterprise license agreements that are up for renewal.

Given the positive catalysts ahead, coupled with IBM's stock remaining "underowned," there is room for upside, Huberty said.

Morgan Stanley maintains an Overweight rating on IBM's stock with a price target boosted from $192 to $198.

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Stifel: Longer-Term Plan In Motion

IBM's margin weakness in the quarter isn't necessarily a concern, Stifel's David Grossman said in a research report. While the reported margin did fall short of expectations, investors should give the company more time in light of its tendency to pair higher levels of investment spending and pricing actions with discrete tax benefits, he said. 

IBM's quarter came in as expected overall, including a modest revenue outperformance, but fell short of changing the near-term negative sentiment surrounding the stock, the analyst said. Improving growth in the services sector, which accounts for 65 percent of revenue, will prove to be a "positive catalyst" for the stock as the year progresses, Grossman said. 

Stifel maintains a Buy rating on IBM's stock with an unchanged $182 price target.

Oppenheimer: Waiting For Margins

Some of the positives in IBM's quarter include "strong" revenue growth in the company's strategic imperatives, which are on track to exceed 50 percent of total revenue in 2018, Oppenheimer's Ittai Kidron said in a research report. On the other hand, a revenue beat was driven mostly by the systems unit, and gross margin fell short of the consensus estimate in every segment, the analyst said.

Investors have reason to be positive overall on the continued progress seen in SI, but for the time being the growth is "baked in" and merely counters any margin concerns, the analyst said. For investor sentiment to improve, IBM must show that its margins have bottomed and growth can come from high-profile business units, especially cognitive, Kidron said. 

Oppenheimer maintains a Perform rating on IBM's stock with no assigned price target.

Elsewhere On The Street

Tigress Financial's Ivan Feinseth said in a newsletter he is "starting to become more positive" on IBM's stock.

BMO Capital Markets' Keith Bachman maintains a Market Perform rating on IBM's stock with an unchanged $175 price target.

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