IBM Stock Price Up 5% Today – Time to Buy IBM stock?

The price of IBM stock is up almost 5% this morning following the release of an upbeat earnings report covering the second quarter of the company’s fiscal year.

IBM reported revenues of $18.7 billion for the second quarter of the year, surpassing the consensus estimate by almost $400 million while resulting in a 3.2% year-on-year leap.

Higher cloud revenues helped the company in pushing its top-line results higher as total sales from this segment jumped 35% during the period. Meanwhile, non- GAAP earnings per share landed at $2.33, slightly higher than the consensus, while GAAP EPS missed the market’s forecasts by 40 cents as they ended the period at $1.47 per share.

For 2021, IBM’s management indicated that it plans to report revenue growth, although it didn’t provide a specific percentage, while free cash flows should land somewhere around $11 and $12 billion. The consensus for 2021 sales ranged from a slight 0.2% retreat to a 2.5% advance in IBM’s top-line results.

Is this upbeat report changing the short-term outlook for IBM despite its long-dated downtrend? The following article takes a closer look at the market’s expectations and the business fundamentals to see how influential these results might be for the firm’s future price action.

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IBM Stock – Technical Analysis

The weekly chart above shows that despite today’s uptick, IBM stock remains in a long-dated downtrend as the company’s revenues have been retreating for years, moving from around $79 billion in 2017 to $73 billion last year.

The firm’s struggles to pivot from its legacy products and solutions to a new wave of trending technologies including the cloud, artificial intelligence (AI), and big data have been the primary bearish catalyst for IBM stock.

Although the results from this quarter are encouraging investors about the possibility of a turnaround, analysts remain skeptical as it is still too early to tell if this will turn into a full-blown reversal of the latest sales downtrend.

In response to the report, analysts from Citigroup and Morgan Stanley raised their targets for IBM but still hold a Neutral rating on the stock. “One good quarter does not make a trend”, analysts from Citigroup commented.

For now, there has been some significant selling during this morning’s session and the stock is already trading almost 1% below its intraday highs. However, the bullish price gap left behind could serve as support for further upward movements while a break above the $150 level could indicate the initiation of a whole new bullish cycle for IBM.

IBM Stock – Fundamental Analysis

The quarterly revenue jump reported by IBM is particularly encouraging as it was mostly aided by higher cloud revenues overall. This could indicate that the firm is managing to attract more customers and volumes toward what is a very promising revenue segment in terms of growth.

Meanwhile, gross margins for IBM remained at the upper end of the firm’s average, landing at 48% during this quarter, while its net profit margin improved compared to the previous two quarters at 7%.

From a financial standpoint, IBM’s balance sheet is relatively healthy with a total of $52 billion in long-term debt on assets of $146 billion including $75 billion in goodwill and $7.95 billion in cash and equivalents.

At $143.4 per share, IBM is currently trading at 17 times its forecasted earnings per share for 2021 ($8.4) while displaying a forward price-to-sales ratio of approximately 1.7. These ratios are not necessarily attractive despite today’s upbeat quarterly results as IBM still has to prove that it can continue to deliver this kind of growth in the following years while the firm’s earnings have been fairly volatile in the past few years, which makes it hard to estimate the company’s long-term earnings generation capacity.

Perhaps the continuation and growth of the firm’s 4.6% dividend yield is the most appealing characteristic of this stock, especially after these results. In this regard, the company said during this quarter that it expects to generate around $12 billion in free cash flows in 2021, which results in a dividend coverage of approximately 2.5 times for IBM.

If the firm manages to overturn its latest sales downtrend, even if growth is unimpressive, the continuation and potential growth of the dividend makes IBM stock an attractive one as a fixed-income instrument.

Moreover, it is important to consider that IBM has delivered nearly 17% in gains so far this year after a relatively muted 2020 where it saw its share price drop by 1.2%. Price stability or mild growth is positive for dividend investors and IBM seems to be offering just that along with its attractive yield.

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