IBM Results: What to Expect?

This quarter’s focus is squarely on the Red Hat acquisition.

EPS $3.08 in line with previous year
Revenue $19.18 billion down from $20 billion a year earlier.

Red Hat
This quarter’s focus is squarely on the Red Hat acquisition.

Following consistent declining sales investors will be looking closely for signs that IBM is finally reaping some rewards for its costly acquisition of Red Hat at $34 billion 1 year ago and which completed last week.

IBM is looking for the Red Hat acquisition to revive its cloud business after it lost ground to the likes of Amazon and Alphabet, Google’s parent company, which have dominated the cloud market inventing new ways to provide infrastructure support to large corporations. 

Once a leader in its field, IBM fell behind with the times and over the past 5 years IBM has failed to impress investors. IBM is down 25% over the past 5 years whilst sector peers are up over 40% and the S&P up 62%.

IBM regularly beats estimates on EPS, which means that it would need to do more than that to impress investors this time round. IBM’s Q2 results should give an idea as to whether Red Hat is bringing IBM back into the game, from which it has been absent for a long period. Investors will want to gain a better understanding of what the plan is for Red Hat and how it will be integrated into the business model. Additionally investors will be keen to learn IBM’s position in the cloud market. This was growing at 12%, a sense of how this will evolve will be closely watched for.

Other areas of interest
Also, worth watching will be gross margins, which could bring a positive surprise as could the global technology service revenue.
On the downside, increased macro-economic uncertainty could continue to strike IBM’s emerging market business which failed to perform as expected in the Q1. 

Analysts’ recommendations:
7 buy, 15 hold, 2 sell. 
Average target price $149.16.

IBM Chart
The chart clearly shows a broad descending trend line from its 2017 high. Whilst the stock has been in recovery mode this year, gaining 26% versus the S&P’s 19% gain, the question is whether the rebound can continue. $126.70 has become a key support, whilst a break through $145.35 could indicate a more bullish outlook. 

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