IBM beat expectations on revenue and earnings and issued strong 2020 earnings guidance on Tuesday. But analysts say the sources of the positive results indicate a less rosy outlook than the earnings and subsequent stock movement would suggest.
IBM shares rose 4.55% to $145.50 Wednesday.
Tuesday, the company reported earnings per share of $4.71, better than analysts estimates of $4.69. Revenue was flat over last year at $21.78 billion, beating analysts' estimates of $21.64 billion. Operating margin improved by 2.9% to 51.8%. And IBM guided for adjusted EPS of at least $13.57, better than the FactSet forecast of $13.33.
Here's what Wall Street analysts were saying:
BMO Capital Markets, Market Perform, Price Target Raised From $152 to $155
"We think two key stock questions are: 1) Can IBM generate durable revenue growth? and 2) Can it grow free cash flow? We don’t think either question was answered this quarter. Netting out all the moving parts, we think revenue growth remains weak, and if IBM meets free cash flow guidance, this will be the third year of no free cash flow growth. Revenues grew by 2.8% year-over-year, including Red Hat and excluding divestitures. If we net out Red Hat, revenues grew by roughly 20 basis points. Systems are a sine curve with peaks and valleys driven by mainframe cycles, though with no growth or declining growth over the longer term. If we eliminated Systems from growth, revenues declined by roughly 180 basis points. We do not think IBM demonstrated the ability to grow revenues. We are modestly raising our target price...our new target price is based on 15 times our newly introduced calendar year 2021 free cash flow estimates."
- Keith Bachman
Morgan Stanley, Equal-Weight, Price Target From $155 to $164
"Higher levels of investment in 2020 pressure free cash flow guidance relative to consensus expectations. Our 2020 EPS increases to $13.33, from $12.80 on the lower tax rate. 4Q beat expectations but investors will likely question sustainability. Drivers of upside came from less sustainable factors like currency and mainframe software. Red Hat the positive stand-out... The remainder of the beat was currency (up $145 million vs. the mid point of prior guidance) and mainframe software, or transaction processing platform (up $300 million vs. Morgan Stanley estimate). 4Q revenue would have come in-line at expected foreign exchange rates and the quarter was a story of early Red Hat synergies and year-end transaction spending in software."
- Katy Huberty
Cantor Fitzgerald, Neutral, Price Target Raised From $133 to $138
"We view a return to consistent organic growth and margin expansion as necessary for sustainable multiple expansion from current levels. IBM is still working toward delivering consistent revenue growth and margin expansion with some work left to do in 2020, particularly in the GTS business. We await better visibility on the company's ability to consistently grow the business & scale margins, along with the impact of Red Hat synergies on IBM's legacy business segments. We raise our PT to $138 from $133, based on 10 times our 2020 non-GAAP EPS estimate. We account for a slight uptick in our multiple to account for an improved outlook."
Credit Suisse, Outperform, Price Target Raised Unchanged at $173
"4Q results are a step in the right direction, giving us confidence in our view that IBM + Red Hat brings together the platform, incumbency, and expertise to help customers on the journey to hybrid cloud. We’re encouraged by early proof points, including the acceleration of Red Hat and early pull-through of 'core' IBM led by Red Hat-related signings doubling in GBS with 50 new client engagements in the quarter. Looking ahead, the sustainability of organic revenue growth will be key for the stock."