IBM shares are trading up sharply Tuesday after the tech giant posted surprisingly strong first quarter financial performance, with better-than-expected demand in both its software and services businesses.
For the quarter, IBM (ticker: IBM) reported revenue of $18.75 billion, up 3% from a year ago and about $450 million ahead of the Street consensus at $18.3 billion. Adjusted for currency and divestitures, revenue was roughly flat compared with a year earlier. Non-GAAP profits were $2.33 a share, four cents above the Street consensus view of $2.29 and up 7% from a year ago.
The company had better-than-expected growth from both the cloud and cognitive software segment, which posted 6.1% revenue growth, and from Global Business Services, up 11.6%. Overall cloud revenue was up 13%, decelerating from 21% in the March quarter, but Red Hat’s revenue growth accelerated to 20% growth, up from 17% in the March quarter.
IBM shares were up 3.5%, at $142.81 , in recent trading. The S&P 500 was up 1.4%.
Street commentary was mostly bullish on the results, given the top- and bottom-line beats. But analysts also noted that IBM has ramped up spending in both key segments, leading to some pressure on margins that is keeping a lid on profit growth. The view is that IBM is investing heavily in both businesses to propel top-line growth once the company completes the spinoff of Kyndryl, its IT services business, later in 2021.
Morgan Stanley analyst Katy Huberty writes in a research note that the quarter “demonstrates improving execution” and a “strengthening demand environment.” She said that investments in the business are driving growth in both the software and business-services segments, “which builds confidence in IBM’s ability to reach sustainable mid-single-digit revenue growth,” but limiting earnings-per-share growth in the short run. Huberty keeps her Equal Weight rating on the stock, but inches up her price target to $164 from $152.
Citigroup analyst Jim Suva likewise maintains a Neutral rating on IBM shares, but boosts his target price to $150 from $140, writing that he was “impressed” with the company’s results, though he’s not ready to upgrade the stock. “It’s natural to ask the question, ‘Is IBM turning the corner?’ We believe the answer is, it’s too early as one good quarter does not make a trend,” he writes. “We look to assess our Neutral rating in the future based on IBM’s market share, profitability, and business execution.”
Evercore ISI analyst Amit Daryanani also was encouraged by the June-quarter results, but he remains cautious on IBM shares, maintaining his In Line rating and $150 target price. He thinks investments will likely continue in the second half, “as IBM ramps up to have a better and more durable growth narrative” after completing the Kyndryl spinoff. “This was a better than feared print but we think lack of margin leverage and signs of more durability will be the key focus points for investors looking forward,” he writes.
Write to Eric J. Savitz at [email protected]
