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An International Business Machines Corporation Stock Earnings Primer

James Brumley

Next week, fallen technology icon International Business Machines Corporation (NYSE:IBM) will release its fourth quarter numbers for fiscal 2017. It could mark and IBM stock turnaround.

On the surface it’s “just another earnings report,” and one of the earlier profit posts of what’s sure to be another raucous earnings season. There’s far more to the upcoming report to current and would-be owners of IBM stock than business-as-usual, however.

The upcoming event could make or break the market’s opinion of the budding but flimsy turnaround effort from ol’ Big Blue. It might just determine the fate of CEO Ginny Rometty.

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Here’s a closer look at what to expect, what to look for and what to think of IBM stock heading into the big-time news.

Budding Turnaround for IBM Stock?

The saga of IBM’s implosion is a rather well documented one. That fact that investors (professional or amateur) know Q3 was the 22nd time in a row International Business Machines Corporation posted declining year-over-year revenue makes it clear they’re counting, and therefore caring.

There was something curious about the previous quarter’s results, however, that offered a glimmer of hope. While sales technically fell, the company offered fourth quarter guidance that was better than Q4-2016’s top line. The losing streak may have finally ended.

It has not been easy, to be sure. IBM essentially missed the advent of cloud computing, and is now chasing rivals like Microsoft Corporation (NASDAQ:MSFT) and Amazon.com, Inc. (NASDAQ:AMZN). Both rivals aren’t just “in” the cloud computing business. They’re creating solutions to problems that enterprises didn’t even know they had.

IBM is finally starting to play catch-up though, addressing niches and filling gaps that are still readily available.

One of those areas is the nascent artificial intelligence arena, where the value of IBM’s Watson is being clarified more every day. Firms in industries ranging from biotech to banking are realizing IBM brings something unique to the table.

Quantum computing is also in development in Rometty’s labs, and the organization is actually leading the blockchain charge; not the Bitcoin charge, but the blockchain charge, which is the underlying technology that makes Bitcoin and other cryptocurrencies work.

Earnings Outlook

With a handful of new business initiatives finally in play in a big way while its legacy businesses continue to fade, the upcoming report could prove to be a pivotal one.

Analysts certainly expect it to be anyway. The pros are calling for $22.07 billion in sales, which translates into a profit of $5.16 per share of IBM stock. The top-line outlook is 1.4% better than the year-ago Q4 top line, when IBM earned $5.01 per share.

If the company gets anywhere near those numbers, it will be the first time in a long time International Business Machines has shown earnings and revenue growth.

Such success would also validate Ginny Rometty being at the helm; there are those who’ve been calling for her exit.

InvestorPlace’s Will Ashworth is one of those doubters, saying earlier this week:

“As much as I see the glass half-full at IBM, I’ve got a nagging belief that current CEO Ginni Rometty needs to move up to Executive Chairman and fill the CEO position with someone who isn’t afraid to make big decisions and then stick with them.

At this moment in time when IBM is making big strides in the cloud, analytics, artificial intelligence and blockchain, it needs a leader who’s not afraid to bet the farm on these segments of its business.”

He’s assessment of what’s happened at, and to, IBM isn’t an unfair one. While the company is finally wading deeper into the so-called Strategic Imperatives (big data and analytics, cloud, mobile, social and security) Rometty defined as priorities a few years back, they’ve not created success rapidly enough to offset the revenue IBM was losing on other fronts.

Then again, Strategic Imperatives as a group enjoyed 10% year-over-year revenue growth during Q3. Perhaps they’ve reached escape velocity. They’re certainly going to be scrutinized when IBM reports next week.

Bottom Line for IBM Stock

IBM stock is headed into its earnings report with an advantage and a disadvantage. Shares are up 17% since August, inviting profit-taking if things are anything less than stellar about the fourth quarter report. IBM stock is still down more than 20% from its 2013 peak though, leaving it plenty of room to run without investors feeling like the stock’s price is overextended.

It’s mostly perception that will dictate whether the market sees the IBM glass as half-full or half-empty. And, that perception will be evident in the post-report rhetoric.

Just hang on tight. It’s going to be interesting no matter what.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

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