Stock of the week - IBM (21.04.2022)

• IBM reported Q1 2022 results on Tuesday

• Sales and profit lower than in Q1 2022

• Results mixed compared to market's forecasts

• Full-year guidance boosted

• IBM sees small impact of withdrawal from Russia

• Stock trades 3% year-to-date higher

International Business Machines Corporation, more widely known as IBM, was one of the first US tech companies to report earnings for the first quarter of 2022. However, IBM's release was overshadowed by a release from Netflix, also on Tuesday, that triggered large moves on the markets. Nevertheless, as a mature, established and dividend-paying stock, IBM may prove to be a nice addition to the tech portfolio. Let's take a look at recent financials from the company. 

Mixed Q1 2022 results

IBM reported financial results for Q1 2022 on Tuesday after the close of the Wall Street session. Sales generated by the company in the January-March 2022 period turned out to be better than expected with total revenue coming in 2.5% above median estimate. Results were also better on a year-over-year basis with total revenue increasing 8% YoY. Solid sales were driven primarily by software and consulting revenue while infrastructure revenue dropped on an annual basis. On the other hand, most earnings measures missed market expectations but were also higher year-over-year.

• Total revenue: $14.2 billion vs $13.85 billion expected

• Software revenue: $5.77 billion (+12.3% YoY)

• Consulting revenue: $4.83 billion (+13.3% YoY)

• Infrastructure revenue: $3.2 billion (-2.3% YoY)

• EPS: $1.40 vs $1.41 expected

• Net Income: $1.27 billion vs $1.31 billion expected

• EBITDA: $2.62 billion vs $2.94 billion expected

Full-year guidance boosted

Company continues to see strong growth across most business segments. While sales in the Infrastructure unit were year-over-year lower in Q1 2022, it is not seen as a reason for concern. IBM is expected to premiere its new next-generation mainframe computer later into the year and it is believed that lower spending in Infrastructure is related to clients waiting for a new product from the company. Outlook for the company's other business units, especially cloud business, is promising. IBM expects that 51% of all IT spending will be made into public cloud by 2025, up from around 41% this year. This means that the company expects demand for cloud services, including its own cloud services, to increase significantly in the coming years. IBM even decided to boost full-year sales guidance for 2022 - company now expects sales growth to be at the high-end of a "mid-single digit range" up from a previous guidance that called for growth to be in  "mid-single digit range".

Small impact of withdrawal from Russia

Unsurprisingly, mentions of the ongoing Russia-Ukraine war and its implications were made in the commentary to earnings release. IBM decided to withdraw from Russia at the beginning of March. Company said that it does not expect a major negative impact from the decision to exit the Russian market as Russia accounted for just 0.5% of its global sales and 2.0% of global profits. As the company becomes more and more oriented towards Software, impact of supply chain disruptions on the company is also likely to be minor. However, consequences of Russia-Ukraine war and sanctions levied on Russia in the aftermath of its invasion may have a negative impact on the European economy. Slowdown in Europe could have a negative impact on IBM's business as the continent accounts for 30% of the company's sales. Nevertheless, the company's adjusted forecasts do not assume an economic slowdown in Europe this year.

A look at the chart

IBM's quarterly earnings report was well received by investors - company's stock rallied around 7% on Wednesday during the first post-earnings trading session. As a result stock has fully erased a year-to-date loss and finished Wednesday's trading around 3% higher compared to end-2021 levels. Situation looks even more interesting when we take a look at the chart. 

Share price of IBM leaped higher yesterday and managed to break above a key resistance zone ranging above $132 handle. This zone is marked with previous price reactions, 61.8% retracement of the pandemic drop as well as downward trendline. A break above the trendline gave some hope that the stock may snap a half year long downward move. Stock finished yesterday's trading slightly above $138 handle, more or less on the level of local highs from early-January and early-February 2022.

Source: xStation5