IBM: 15% Is The Magic Number

Jul.14.14 | About: International Business (IBM)

By Paul Shea

International Business Machines Corp. (NYSE:IBM) may be the most prestigious name in computing, but the company's fortunes have not exactly reflected past glories in recent years. The transition to cloud services has seen the company lose out to newer companies like Inc. (NASDAQ:AMZN), and the firm's future has been discounted by the market.

In a new report on the computer giant, Morgan Stanley analyst Katey Huberty says that the company's second quarter was likely mixed as the firm continues to transition into the cloud. Huberty says that the current transition is the second "paradigm shift" in the company's history, counting the 1990s rise of distributed computing as the first.

IBM results reflect difficult cloud environment

The most important figure in the report may be the proportion of revenue the company garners from cloud activities. That figure stood at 4% in the same three months of 2013, and is expected to grow through 2014. Huberty is descriptive on this particular number, projecting a rise to 15% is necessary in order to renew shareholder confidence.

"During the distributed computing disruption, IBM shares bottomed when services, which led the company out of the crisis, reached 15% total revenue," according to the report. The analyst believes that when cloud computing revenue hits this number a key inflection point for shares will have been reached, but "more aggressive investment may be needed to hit the inflection point."

IBM is in the midst of an arduous process. The company's turnaround doesn't put it in the kind of danger as those at BlackBerry (NASDAQ:BBRY) or Hewlett Packard (NYSE:HPQ), but it undermines the confidence of investors, despite the early entry into the cloud market.

Morgan Stanley rates IBM at Equal Weight, and expects the company to show earnings of $4.28 per share for the three months through June.

Turnaround time at IBM

Despite the less than celebratory results expected from the company, Huberty is cautiously optimistic about its future. According to the analyst IBM's potential reprieve could arrive by the end of the year, or in 2015.

In recent years, IBM has made efforts to distance itself from the low-margin parts of its business, divesting itself of personal computers almost a decade ago and agreeing to sell its low-end server business to Lenovo earlier this year.

IBM stock has remained solid, though unmoving, during the company's transition. In the last 12 months the firm's shares lost just over 1% of their value. The wider market, measured by the S&P 500, gained more than 17% in the same period.

IBM will release its earnings numbers for the second quarter of 2014 on Thursday, July 17, after the market closes on Wall Street. Consensus estimates project earnings of $4.31 per share for the three months. Revenue is expected to come in at $23.3 billion.

Disclosure: None.

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