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IBM Stock: Why Investors Are Bearish on It

Posted On August 8, 2017 4:35 pm
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the front of IBM's corporate building in Amsterdam

International Business Machines Corp. (NYSE:IBM) is under pressure as the company faces swiftly changing industry environment and stalling growth. IBM missed revenue estimates for the second quarter. In terms of IBM stock, the company has now reported year-over-year revenue declines for no less than 21 consecutive quarters.

International Business Machines Corp. (NYSE:IBM)’s strategic imperatives business, which also covers the Cloud business, is returning lower-than-expected growth. Strategic Imperatives segment now accounts for a whopping 45% of total revenue of IBM.

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What are IBM’s Catalysts?

IBM is working on storage and developing some state-of-the-art innovative technologies in this domain, which is important for Cloud computing, AI and HPC. IBM recently made another world record for tape storage for areal recording.

IBM has a lead in the market due to its SDS (software-defined storage) with its Spectrum Storage portfolio. But analysts think that IBM’s advancements in the storage sector will take years to weigh in on the stock price.

Analysts think that IBM’s blockchain technology could be its next big growth driver. IBM’s blockchain is currently being used by major companies including Walmart, Northern Trust, American International Group (AIG), and Maersk.

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Declining Revenue

In the second quarter, International Business Machines Corp. (NYSE:IBM)’s revenue for all five major operating segments dropped.  IBM’s Technology Services & Cloud Platforms revenue also decreased by over 5%.  On Monday, Bernstein analyst Toni Sacconaghi said in a report that IBM stock investors should not expect any improvement in IBM services business in the short term.

IBM’s cloud business is facing a tough competition from giants like Microsoft, Amazon, and Oracle. IBM’s Watson platform is losing traction because the Enterprise now has several other options available for competitive pricing.

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Decreasing IBM Stock Dividends, Rising Debt

International Business Machines Corp. (NYSE:IBM)’s dividend growth is falling. In 2016, dividend growth at IBM came in at just 10%, lowest since 2003.  In 2017, the dividend growth is just 7.3%, disappointing when compared to years of double-digit dividend increases in the past. IBM management in the past had tried to calm investors by upping dividend yields. This has resulted in surging debt levels.

An IBM Dividend Growth Rate Chart

An IBM Financial Chart that shows quarterly debt-to-equity and annual net total long-term debt

International Business Machines Corp. (NYSE:IBM)’s Cash Flow From Operations is also declining at a quarterly average of -$55MM.

An annual IBM Cash From Operations Chart from 2009 to the present

International Business Machines Corp. (NYSE:IBM) is down over 13% year-to-date. IBM has a trailing 12-month P/E multiple of 12x, and P/S multiple of 1.8x, which is a reasonable valuation when compared to the industry peers.

Related: Why Apple Investors Shouldn’t Be Overly Optimistic

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