International Business Machines (Ticker Symbol: IBM) reported earnings and revenue on Tuesday. The company’s shares dropped as much as 4% after the release when the company revealed that it generated less revenue than analysts had expected. IBM earned $2.25 per share vs. the $2.22 per share that analysts were expecting, while revenue fell short at $18.18 billion vs. 18.46 billion.
IBM is acquiring Red Hat, a major distributor of open-source software and technology, in a deal valued around $34 billion, which is expected to close in the second half of this year. This is IBM’s largest deal ever and it would be the third largest acquisition of all time within the technology sector. Due to the acquisition, IBM will pause its share buyback programs in 2020 and 2021 as a cautionary measure. However, the company did state that it will not change its dividend.
IBM had a rough start to the year in 2018 and began to slowly grind lower. Things really accelerated to the downside with an extremely negative earnings and revenue release that sent the stock much lower into the fourth quarter of 2018. In that same quarter, the stock bottomed, forming a bullish divergence pattern, where the stock makes a lower low in price but the Relative Strength Index makes a higher low. (As indicated on the chart by the purple circles with arrows) Traders and investors sometimes look at divergences for a possible pause within the current trend which can, at times, lead to a reversal, as occurred in IBM’s case.
At the start of 2019, IBM’s stock took off to a great start, rallying 7% after releasing earnings that beat Wall Street analysts estimates on the top and bottom lines. IBM also announced that its full-year revenue grew 1% in 2018, which made it the first time IBM saw annual revenue growth since 2011! The stock gapped higher on the news, ripping right through its 100-Day Moving Average and proceeded to grind higher. It is currently finding support just above its 200-Day Moving Average, which is around $136.00 price level.
(Chart above courtesy of www.tipranks.com)
Based on a survey of 13 analysts offering 12-month price targets, the average price target for IBM’s stock is $158.38. According to that number, the stock is priced at a discount relative to Wall Street’s analysts and could be considered undervalued around current levels near $140.42.
IBM has been trying to catch up to Microsoft and Alphabet in the cloud infrastructure space. The cloud is one of IBM’s major growth drivers, along with social, mobile and analytics. These four areas made up of more than half of IBM’s revenue in 2018. IBM shareholders have had a great start to the year with the stock up almost 25% since the beginning of 2019 with no current signs it slowing soon.