IBM shares fell 7.3% in after hours trading on Jan. 21 to $122.03 after it posted disappointing 4Q results. The technology giant saw revenues of $20.4 billion in the fourth quarter, falling short of the $20.7 billion consensus estimate. However, the company bested analysts’ $1.79 EPS estimate, with it reporting 4Q EPS of $2.07.
The Chairman and CEO of IBM (IBM), Arvind Krishna, commented on the results, “We made progress in 2020 growing our hybrid cloud platform as the foundation for our clients’ digital transformations while dealing with the broader uncertainty of the macro environment. The actions we are taking to focus on hybrid cloud and AI will take hold, giving us confidence we can achieve revenue growth in 2021.”
IBM’s cloud and cognitive software unit, its biggest unit with an approximately 33.5% revenue share in 4Q20, also saw revenues drop. This unit posted revenues of $6.8 billion, reflecting a decline of 4.5% year-on-year.
The company expects revenues to increase in FY21 based on the current foreign exchange rates. It also projects adjusted free cash flow to be between $11 billion to $12 billion in FY21. This adjusted free cash flow outlook excludes a cash impact of around $3 billion associated with the company’s structural changes and the transaction costs related to the company split.
In October last year, IBM had announced that it planned to focus on hybrid cloud technology and intended to separate the Managed Infrastructure Services unit into a new public company by the end of 2021. Hybrid cloud technology uses a combination of datacenters and leased resources to process and manage data. (See IBM stock analysis on TipRanks)
In reaction to the earnings release, Wedbush analyst Moshe Katri commented, “Maintain Neutral rating, $140 PT on IBM post another mixed quarterly performance, with Q4/CY20 revenue miss, CEPS upside as results continue to reflect an ongoing cannibalization phase of its legacy software/services revenue base (roughly 70% of mix), and potential share losses (per our recent IT advisor call, pointing to multiple $B contracts at play/risk) offset by a relatively underperforming (but growing) digital/cloud business.”
Overall, analysts are cautiously optimistic about the stock and the consensus is a Moderate Buy, with 1 analyst suggesting a Buy and 2 analysts recommending a Hold. The average price target of $137.33 implies 4.3% upside potential to current levels.
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