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IBM Needs to Show Us It Can Succeed Before It’s a Buy Again

Nicolas Chahine

I’m not yet a believer in the ability of IBM (NYSE:IBM) to make the shift to the new tech world under its current leadership. Every other mega-cap technology company has already adapted to the new ways except IBM. While IBM stock came into its earnings event up 27% year-to-date compared to the S&P 500’s 16%, it still trails the index and its competitors tremendously for the long term.

IBM Stock Needs to Show Us It Can Succeed Before It's a Buy Again

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IBM is down 25% in five years, while the SPY is up 56%. Microsoft (NASDAQ:MSFT) and Salesforce (NYSE:CRM) are up 200% for the same period. More to that, Cisco (NASDAQ:CSCO) and Oracle (NYSE:ORCL) are up 145% and 38% respectively. So this is proof that old dogs can learn new tricks … except for IBM.

Management talks the talk, but for some reason, it’s hard to see the results without a forensic technician on hand. If CEO Ginni Rometti has to point out the innovation, then it’s probably not as impressive as she thinks it is.

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The new formula for tech success is simple. Companies now want to use subscription services that are based in the cloud. Anything else is considered ancient and is off trend. This is likely to continue for a few years. CRM started the model and Amazon (NASDAQ:AMZN) accelerated it with the advent of its AWS.

Last night, IBM management missed on sales but managed to beat their bottom line. This means IBM is managing profitability, but it still struggles to meet its revenue expectations. Also, to make things even more confusing they rearranged some of the revenue segments to muddle things. So I caution you on chasing mentions of “cloud” in their statements — now, it’s a matter of showing, not just telling.

While I’m not an expert on IBM’s business, I do know mediocrity when I see it. This report represents its third consecutive decline in quarter sales year-over-year. Clearly IBM needs to make another shift of sorts. Whatever the company is doing now is not working, yet the CEO still gets the benefit of the doubt. At some point, IBM needs intervention so it can transform itself as MSFT did with its new CEO Satya Nadella.

My criticism here is not the same as shorting the stock, but it’s not a good bullish thesis either. The good news is that fundamentally, IBM stock is cheap as it sells at a price-to-earnings ratio of 12. This is even cheaper than Apple (NASDAQ:AAPL), so there is value below and it’s not likely to be a major loss to hold the shares here. It’s just stagnating.


Bottom Line on IBM Stock

Maybe its acquisition of Red Hat (NYSE:RHT) is their ticket out of the stock muck in which they are stuck. If so, then a lot is riding on that and if it fails for any reason, both of those stocks are doomed.

In addition to its fundamentals, IBM stock can’t rally here because it’s facing heavy technical resistance. Yes, IBM rallied an amazing 34% off its December lows. But up here it runs into the supply of sellers who have been stuck up since the October disaster.

Pivot zones like these are where bulls and bears agree on price so they like to fight it out hard. This creates price action congestion and when a stock is rallying this translates into resistance. All of that means it won’t be as easy for IBM stock to breach the $145 zone as it was getting here. Conversely, IBM stock has support above $132 per share, so it would take a big calamity in the equity markets for it to fall below it.

If I owned shares, I’d put them to work by selling covered calls against them. This is an easy way to create synthetic dividends above and beyond the company’s 4% yield.

Another bit of potentially good news is that most analysts have given up on the rally in IBM, so they rate the stock as a HOLD. When IBM finally delivers actual turnaround results there should be a slew of upgrades to cause a buying catalyst for the stock.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.

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