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After IBM's Mixed Q4, 3 Analysts On Whether 2021 Will Be A Turnaround Year

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After IBM's Mixed Q4, 3 Analysts On Whether 2021 Will Be A Turnaround Year

Shares of International Business Machines Corporation (NYSE: IBM) opened more than 8% lower on Friday after the company posted a fourth consecutive quarter of declining revenue on Thursday

What Happened: For the fourth quarter, IBM reported adjusted earnings of $2.07 per share, beating the consensus Street estimate of $1.79

Quarterly sales came in at just $20.37 billion, falling below the estimate of $20.68 billion. 

Why It's Important: Much of the loss was contributed to the cloud and cognitive software segments, which fell far short of analyst expectations.

IBM reported $6.84 billion in sales for this segment, missing UBS' estimate by 6.3%.

On the company conference call, IBM’s Chief Financial Officer Jim Kavanaugh referenced the tough challenges brought on by the pandemic.

"Given the level of macroeconomic uncertainty, more clients tended to move toward shorter duration engagements, impacting our software revenue," the CFO said. 

CEO Arvind Krishna asked investors to focus on the company’s plans to grow its cloud and artificial intelligence segments and said he has “confidence we can achieve revenue growth in 2021.”

The company declined to issue formal guidance for 2021 earnings. 

IBM Analysts Focus On Growth: BofA Securities analyst Wamsi Mohan said investors should focus on the potential growth of the company, as it continues to shift its business goals.   

"CEO Arvind Krishna is implementing significant changes at the organization including major changes to go-to-market, expansion of ecosystem of partners, smaller M&A with a focus on consulting, focused investment and the spin of the managed infrastructure services business," the analyst said. 

Wedbush's Moshe Katri said IBM's new business model has both risk and potential catalysts. 

“CEPS upside as results continue to reflect an ongoing cannibalization phase of its legacy software/services revenue base, and potential share losses offset by a relatively underperforming (but growing) digital/cloud business,” the analyst said. 

UBS is less optimistic that IBM can turn around in 2021.

While recognizing the shift to hybrid-cloud software, kicked off with IBM's purchase of Red Hat in 2018 and smaller software deals, UBS does not see significant revenue growth for this year. 

“Factoring in an est 200 bp tailwind from FX, we forecast organic rev growth in CY21 will likely again be negative, a disappointment relative to street expectations,” according to the sell-side firm.   

Wedbush and BofA both said that IBM is at risk from competitors  like Alphabet Inc (NASDAQ: GOOG) and Microsoft Corp (NASDAQ: MSFT). 

“Increased competition, especially from large technology companies” is a risk to Wedbush's IBM rating and price target, the sell-side firm said.

IBM Ratings, Price Targets: Bank of America has a Buy rating and $150 price target. . 

Wedbush has a Neutral rating and $140 price target. 

UBS has a Neutral rating with a price target lowered from $125 to $122. 

IBM Price Action: IBM shares lost 9.91% in Friday's session, closing at $118.61. 

Photo courtesy of IBM. 

Latest Ratings for IBM

DateFirmActionFromTo
Oct 2020BMO CapitalMaintainsMarket Perform
Oct 2020Morgan StanleyMaintainsEqual-Weight
Jul 2020Argus ResearchUpgradesHoldBuy

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