Is IBM (IBM Stock Quote, Chart, News NYSE:IBM) a buy right now?
The US tech giant just had a bang-up quarter and appears to have made the right move last year in doling out big time for open-source software company Red Hat. But investors should be cautious, says portfolio manager Ian Fung of Davis Rea, who argues that even with the stock at today’s bargain prices, IBM’s dependence on legacy business will likely create a drag for the foreseeable future.
“It’s interesting to look at tech companies — some of them are a lot cheaper than others,” said Fung, vice president of Davis Rea, who spoke to BNN Bloomberg last Friday. “I don’t want to say value trap but there’s a reason why IBM is starting to trade a little cheaper. They have a lot of exposure to legacy businesses that haven’t been participating as much in the shift to newer things even from a database perspective.”
IBM impressed with its latest quarterly results delivered in late January, where the company exceeded analysts’ expectations for both earnings and revenue. The company posted a $21.77-billion top line, better than the $21.64 billion consensus, and EPS excluding certain items of $4.71 per share versus the Street’s $4.69 per share. (All figures in US dollars.)
More interesting was management’s guidance for 2020 which again arrived above expectations, with the company calling for “sustained revenue growth” over the year and full-year earnings of $13.35 per share compared to the $13.29 expected by analysts.
Much of that good news was attributed to growth in the company’s Cloud and Cognitive Software segment which includes Red Hat, bought last July for $34 billion and showing revenue up 24 per cent in this latest quarter.
The growth compares to IBM’s legacy businesses in Global Business Services (GBS) and Global Tech Services (GTS) which saw revenue declines of 0.3 per cent and 4 per cent, respectively, over the quarter.
IBM has seen its share price tumble for a number of years now, where a high of just over $200 per share came back in 2013. The stock has been stuck within the $130 – $150 range for the past year, with the recent boost from the quarterly results helping to lift it temporarily above the $150 mark.
Fung says IBM needs to outline a stronger runway for growth before investors should take interest, especially when there are other names out there like Microsoft which have proved their ability to transition.
“I don’t want to say [IBM] is falling behind but it’s definitely that having all that exposure to legacy business is tough to overcome,” says Fung. “I would not be a buyer of IBM here. I would be more inclined to get something with a little more secular growth.”
“Microsoft made a great transition [from legacy products] because they invested early and they were successful in shifting their business into the cloud and that’s been a big driver of revenue and growth,” he said.
“I don’t see that for IBM just yet.”