Tuesday, October 20, 2020

IBM Stock Slides Despite Strong Cloud Revenue Growth

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News shaping
the markets today

     

What’s happening: Shares of International Business Machines Corp headed south in extended trading on Monday despite the company reporting its third-quarter revenue above market expectations.

What happened: Earlier this month, IBM announced plans to spin off its legacy IT services unit to focus on its hybrid cloud business. This move by the world’s biggest computing company was well received by investors, sending its stock higher.

Investors were disappointed, however, by the company not issuing any forward guidance when it reported its third-quarter results.

How were the results: The 109 year old company reported a decline in sales and earnings for the third quarter.

Revenues declined to $17.6 billion, from $18.03 billion in the same quarter last year, but came in ahead of the consensus view of $17.54 billion.

Earnings stood at $2.3 billion, or $2.58 per share, down from $2.68 per share, in the year-ago quarter. The figure was in-line with expectations.

Why it matters: After reporting flat to declining sales for two years, IBM decided to spin off  its IT outsourcing business as customers migrated to the cloud. Revenues at IBM’s Global Business Services unit, which includes its hardware and software business, declined 5% to $4 billion last quarter.

The company is looking to increase its focus on internet-based services and Artificial Intelligence business, with a boom in the demand for cloud services amid remote work trends. The splitting of the company will be completed in 2021.

IBM’s cloud revenues grew a healthy 19% to $6.0 billion during the third quarter, driven by Red Hat which was acquired by the company in 2018.

The company’s new CEO Arvind Krishna announced initiatives to save costs, including cutting thousands of jobs as clients reduced their investments and deferred software deals amid the pandemic.

“As we look forward, the case for hybrid cloud is clear,” Krishna said. “It’s a tremendous opportunity valued at $1 trillion with most of the enterprise opportunity ahead of us.”

IBM had pulled its guidance for the full year in April citing pandemic-induced uncertainty. The company refrained from announcing any guidance yesterday.

How shares responded: IBM’s shares plunged 3.1% to $121.75 in after-hours trading following the release of quarterly results. For the year, the stock is down 6% versus a 1% downturn in the Dow Jones index and a 28% rise in the Nasdaq 100.

What to watch: Investors will keep an eye on the revival of growth at IBM, following its decision to separate the IT infrastructure unit and focus on its cloud and AI business. Markets will also look out for news related to the company hiring for the new business and generating revenue growth.

The Markets Today

     

US stocks will be in focus today, with markets assessing recent developments over the new fiscal stimulus package.

Context: US equities surrendered earlier gains to settle near session lows on Monday, as investors remained worried about a covid-19 relief package being announced before the Presidential elections.

Details: Investors remained concerned about lawmakers and the White House reaching a stimulus agreement. House Speaker Nancy Pelosi had given 48 hours to reach an approval, which will lapse today.

Investors remained subdued despite the National Association of Home Builders’ confidence index improving 2 points to a reading of 85 in October and China reporting GDP growth of 4.9% for the third quarter.

The Dow Jones index shed 410.89 points to close at 28,195.42 on Monday, after surging as high as 28,711.93 earlier in the session. The S&P 500 fell by 56.89 points to 3,426.92, while the Nasdaq 100 settled at 11,478.88, recording a 1.7% decline.

What to watch: Investors await reports on housing starts and building permits from the US. Housing starts declined by 5.1% to an annualised rate of 1,416,000 in August, while building permits slipped 0.9% to a 1.47 million rate. 

Markets will also monitor stimulus developments with House Speaker Nancy Pelosi setting today as the deadline to get a relief package approved ahead of the elections.

Other Markets: European trading indices closed mostly lower on Monday, with the FTSE 100, German DAX 30 and French 40 down 0.59%, 0.42% and 0.13%, respectively.

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Futures at 0400 (GMT)

What else to watch today

     

Eurozone’s current account, Italy’s construction output and current account, Russia's unemployment rate, retail sales, real wages and gross domestic product as well as the US Redbook index and API’s crude oil stockpiles.