International Business Machines Corporation (IBM) is trading down more than 9% in Friday’s premarket after beating Q4 2020 earnings estimates while running out of revenue. The struggling tech icon earned $2.07 per share in the quarter, $0.19 better than expectations, while revenue fell 6.5% year over year. other to reach $20.37 billion, missing consensus estimates of $250 million. Total cloud revenue grew 10%, far less than rivals and a giant leap from third quarter growth of 19%.
Key points to remember
- IBM sold after missing fourth-quarter revenue estimates.
- Cloud revenue growth slowed from 19% in the third quarter to 10% in the fourth quarter.
- Other major divisions saw declines in revenue.
- The sell-off could end around $115 and provide a buying opportunity.
- A spin off slow splits could spark speculative interest later this year.
Business services, technology services and systems revenues all fell year over year, underscoring IBM’s continued failure to compete in the technology market. The company is taking steps to return to growth, transforming its managed infrastructure services (MIS) business into a publicly traded entity, in a transaction expected to close in late 2021. In addition, a frenzy of acquisitions in three months has rapidly growing cloud and fintech companies TruQua Enterprises, Instana, Expertus Technologies, Nordcloud, 7Summits and Taos Mountain.
The fallout will affect slow-growing legacy operations, allowing the company to focus on fast-growing cloud computing and artificial intelligence businesses. It is hoped that the new lean IBM will command a much higher various than the old-school tech giant, marking the company’s most significant move in decades. However, growing cloud concerns could affect sentiment as the breakout approaches, given the deceleration in the fourth quarter.
Wall Street has taken a cautious stance on IBM since the spinoff was first announced in October, maintaining a “Hold” rating based on five “Buy” recommendations, nine “Hold” and two “Sell”. Price targets currently range from a low of $115 to a high of $165, while the stock is expected to open Friday’s session just $6 above the target low. This depressed placement may not mitigate near-term declines given the 10bp selloff difference.
Point
A spin off is the creation of an independent company by the sale or distribution of new shares of an existing company or a division of a parent company. Spin-off companies are expected to be worth more as independent entities than as parts of a larger enterprise. When a company spins off a business unit that has its own management structure, it creates it as an independent company under a renamed business entity.
IBM monthly chart (2010 – 2021)
TradingView.com
The stock surpassed the 1999 high at $139.19 in 2010 and posted impressive gains in 2013, when the uptrend ended at an all-time high near $216. It broke down from a double top pattern a few months later, entering a sharp decline that successfully tested the breakout level in 2016. The subsequent rally wave recouped about half of the loss and reversed, posting the next lower high of an endless series that now spans seven years.
The bottom fell in the first quarter of 2020, dumping the stock in Support to an ascending trendline dating back to 2002. The descending trendline of the lower highs opposes this shallow uptrend, generating huge triangular pattern which will peak in just two years. In turn, a breakout would necessitate a rally above $150, while a sell-off to the March 2020 low at $90.56 would spell disaster for the remaining bulls.
The monthly stochastic oscillator is engaged in an active buying cycle, predicting that the selling pressure will soon cease. However, that won’t help shareholders in the short term, with Friday’s gap triggering instant losses. The small black trendline from recent lows looks like solid support, providing a potential long-term buying opportunity around $115. Either way, IBM will have to do a much better job of selling the spin-off in the coming months to attract speculative interest.
Point
A Triangle is a chart pattern, represented by drawing trend lines along a converging price range, which suggests a break in the prevailing trend. Technical analysts categorize triangles as continuation patterns.
The essential
IBM sells Friday after missing revenue estimates and reporting disappointing cloud growth.
Disclosure: The author held no position in the aforementioned titles at the time of publication.