IBM’s results lifted other low-multiple, legacy-tech stocks including Oracle and HP.
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Score one for the old timers. On a day when Netflix stock plunged 35% on concerns about disappointing subscriber growth, the market is getting a boost from none other than 111-year old International Business Machines . As the company’s first-quarter financial results demonstrated, the tech giant is making clear progress on its push to reshape the company, shifting its focus to the cloud and artificial intelligence.
IBM (ticker: IBM) stock spiked 7.1% on the earnings news, contributing to Wednesday’s 0.7% rally on the Dow Jones Industrial Average . The stock is now up about 3.5% for the year to date, and 20% higher since Barron’s wrote a bullish cover story on the outlook for the company in November.
The company’s strong results and upbeat comments on the outlook for IT spending are giving a boost to other low-multiple legacy enterprise-tech plays. Accenture (ACN), Oracle (ORCL), and SAP (SAP) are all up 2%, while HP Inc . (HPQ), Hewlett-Packard Enterprise (HPE), Cisco Systems (CSCO) and Dell Technologies ( DELL
) are all 3% higher.
To review: For the first quarter, IBM posted revenue of $14.2 billion, which was up 8%, or 11% in constant currency, and well ahead of the Street consensus forecast of $13.8 billion. The company noted that the constant-currency growth rate includes about 5 percentage points tied to sales to Kyndryl (KD), the company’s former managed services unit, which was spun off to shareholders late last year. Non-GAAP profits for IBM were $1.40 a share, a penny ahead of Street expectations. Free cash flow was $1.2 billion, in line with expectations.
Also, IBM now expects to hit the high end of its previous forecast for mid-single-digit revenue growth on a constant-currency basis for the full year, excluding the contribution from Kyndryl. Currency is expected to be a 3- to 4-point headwind for the year based on mid-April rates. The company continues to expect $10 billion to $10.5 billion in free cash flow for the year.
IBM saw strength across the board, with better-than-expected results from its two most important businesses—software and services. Software revenue was $5.8 billion, up 12.3%, or up 15.4% when adjusted for currency, and well ahead of the Street consensus at $5.6 billion. Consulting revenue was $4.8 billion, up 13.3%, or 17.4% when adjusted for currency, and again above consensus at $4.6 billion.
Infrastructure revenue, which includes mainframe hardware, was $3.2 billion, off 2.3%, but up 0.3% adjusted for foreign exchange, and above the Street forecast at $3.1 billion. And hardware growth should pick up from here—IBM launched a new generation of mainframes in early April.
Over the past year, IBM has restructured its business to focus on its software and consulting units, last year spinning off its managed IT services business, now known as Kyndryl (KD). IBM also recently agreed to sell its Watson Health unit to private-equity shop Francisco Partners.
In an interview on Tuesday, CEO Arvind Krishna noted that even if the economy softens, he thinks global IT spending will remain robust—4 to 5 percentage points ahead of GDP. And so even in a downturn, he says, IBM should be able to show healthy growth from here.
Morgan Stanley analyst Erik Woodring earlier this month made a timely call on IBM stock, boosting his rating to Overweight from Equal Weight, with a target price of $150. On Wednesday, he repeated his bullish stance, lifting his target to $157. Woodring notes that the company’s constant-currency growth rate is accelerating ex-Kyndryl—to 6% this quarter, from 5% in the December quarter and 1% in the September quarter. He writes that the results reflect “the combination of a streamlined portfolio and underlying market strength in software and consulting demand.” Woodring notes that a recent Morgan Stanley survey of chief information officers finds current IT spending growth above the 10-year pre-Covid average.
“While this quarter alone won’t convince the market of sustainable mid-single-digit growth over multiple years, we do believe that stringing together consecutive quarters of outperformance illustrates that there is a clearer path to year-over-year growth in 2022, which was corroborated by management’s stronger 2022 revenue guide,” he writes.
BofA Global Research analyst Wamsi Mohan likewise repeated his Buy rating on IBM stock on the earnings news, lifting his price target to $165, from $162. “Sustainable revenue growth has been historically elusive for IBM but the company has made significant progress on portfolio changes and in our opinion, revenue outperformance while maintaining free cash flow is a material positive change in trajectory,” he writes.
Write to Eric J. Savitz at [email protected]
