While IBM reported a second consecutive quarter with drops in revenue, it’s really all about beating expectations, and IBM clearly did that, pushing its stock further up.
IBM released its 2018 Q4 numbers after the market closed on Tuesday, and while revenue decreased by 3.5% during the quarter, the overall message was a better one than analysts expected, and this resulted in IBM stock gaining 8.46% Wednesday, closing at $132.89 per share.
IBM was already in the midst of a comeback, having already moved up from its December 24 low of $107.57, and with today’s gains added in, this adds up to about a 24% increase in its share price from that bottom.
IBM still has a good way to go to recapture its fourth quarter losses in the markets though. It closed the day on October 2 at $153.75 per share, one day before the major markets hit their recent peak.
December 24 was not only the low point for IBM but for the markets as well, and both have been rebounding since. IBM’s resurgence has outpaced that of the market since though, and this is especially the case with Wednesday’s gains added in.
Both Stocks and Markets Matter a Lot
What really should be standing out for us as investors is the manner in which stocks follow the overall market these days. This isn’t true for all stocks but the big ones such as IBM do move with the market a lot, and this is to do with the new landscape of the stock market, where baskets of stocks in an index comprise such a large percentage of trading, in addition to people buying and selling individual stocks based upon market trends so much.
This is not a new phenomenon by any means, but things work like this a lot more than they used to. It never really was enough to just go by a company’s prospects when trading or investing in their stock, but the way that the market is moving is now the most important thing to be looking at.
Stocks may move more or less in the direction of the market depending on their outlook and individual performance, but still will move with the overall trend to a great degree. When you see the high and low points of a stock match exactly with market highs and lows, like we are seeing with IBM, you know that they are really in unison in direction at least.
The overall market is trending up now, which means that stocks like IBM are influenced in the right direction, although how far they move up then depends on things like their business performance, things that were revealed in announcements like the one IBM just made.
Should the market recovery continue, and IBM’s business outlook remains fairly promising, the potential for IBM stock moving even higher remains a distinct possibility. While IBM has been pretty beat up at times, the early October high where it moves up another 20% to reach is not out of the question, especially since this was not so long ago and things are looking up for the company.
We will need a good increase in the influx of capital to the stock market in general, measured by movements in the prices of the major indexes, before we may reasonably expect this, and the market stalling and especially pulling back by a fair bit can and probably will dash any plans of this happening.
This correlation is one that many investors do not really appreciate enough, and they are not alone, as a lot of analysts need to pay more attention to these things than they tend to do, often letting their focus on the company lead them away from the big picture, and the big picture matters a great deal as well.
This doesn’t mean that business results don’t matter that much, and they clearly do, because this does drive supply and demand for the stock all by itself depending on the results. We saw a perfect example of this on Wednesday actually, with IBM beating the Dow by almost 8% due to this news.
More Profit Equals More Enthusiasm
Earnings per share rose $0.09 in 2018 over 2017 results, including a gain of $0.05 per share in Q4. This isn’t much but also isn’t indicative of a company that is heading in the wrong direction profit-wise, as some believed. While their competition has increased more and more over the past few decades, IBM still plays a big role in the technology sector and is still a huge company, with revenues of $80 billion a year.
This is less than a third of Apple’s revenue, and while IBM was king when Apple was just an idea, it has grown up and then some. IBM, on the other hand, has had to rethink their business model several times over the years and has remade itself into a pretty forward-thinking company these days.
IBM is no longer just a business machines company, as they now get half their revenues, about $40 billion a year, from their services sector, with $20 billion coming from their cloud operations alone.
The road here hasn’t been without its bumps though, and it took current CEO Ginni Rometti 5 years to finally get the company from seeing declining revenues to actually seeing them increase.
Although revenues did drop last quarter, they did not decline as much as predicted, and the market has spoken about these current results and have given the company a resounding vote of confidence.
It wasn’t all good news though, as IBM’s mainframe business, which many counted on to help grow the company, disappointed with a 44% drop in revenue in Q4. At one time not that long ago, that would have spelled bad news overall for the company, but this is not your father’s IBM and their other business interests stepped up to compensate, the ones that people are hopeful about.
We need to realize that, in spite of its modest recovery, IBM will need to continue this to maintain their current more positive outlook. Arvind Ramnani of KeyBanc Capital Markets cautions us that in order to say that things have really rebounded, we’ll have to see this sustained. He also believes that IBM’s revenue will be down again this current quarter, but as we just saw, that in itself doesn’t mean we’ll be reversing course.