IBM Expects to Return to Revenue Growth in 2021 - Earnings Review

Ruben Fields
January 23, 2021

Certainly, if IBM's results for the fourth quarter of 2020 are anything to go by, this goal may be achievable. IBM's revenues of $20.37 billion decreased 6.5% from the same quarter a year ago as it missed Wall Street analysts' estimates by roughly $260 million.

Although IBM said its planned spinoff of its $19 billion managed-infrastructure services business is on track and on scheduled to be completed by the end of the year, some analysts have fretted that the preparation for the massive divestiture is distracting the company from more pressing day-to-day business.

The US technology company stated that it expected to return to growth in 2021, providing revenue guidance that it had previously removed due to the pandemic previous year.

IBM's stock price fell as low as $117.37 per share after the open and is now down 10.24% at $118.20, levels not seen since November 2020. "That level of free cash flow deterioration is concerning for any company".

The company promised to return to "mid-single-digit" growth in 2021 as uncertainty about the macro economic environment lifts and the company's renewed emphasis on hybrid cloud and artificial intelligence bears fruit.

That dynamic leaves IBM limited in its ability to change its course, Ellis wrote. IBM's stock closed at $131.65 on Thursday, down 5.4% over the past year.

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Its cloud revenue rose 10% but investors were not impressed by the final-quarter figures.

Ellis maintained a sell rating and $115 target price, a common theme from analysts Friday morning as nearly all chose to maintain their ratings and targets on the stock after the results. The business also reduced its debt by $3.9 billion during the last quarter of 2020. After the results, they are still waiting for proof.

Its other main business segments, including consulting, infrastructure and cloud services and operating systems software, all saw revenue drop between 2019 and 2020.

Not all analysts were put off by IBM choosing to focus on adjusted free cash flow and projecting revenue growth out of line with its historical performance, as JPMorgan analysts called it "a real positive that the new CEO is serious about creating a culture of delivering sustainable revenue growth and FCF instead of manufacturing EPS".

Still, even those analysts - who do not rate IBM "for policy reasons" - are rather pessimistic about the road ahead for IBM. "The actions we are taking to focus on hybrid cloud and AI [artificial intelligence] will take hold, giving us confidence we can achieve revenue growth in 2021". The average price target as of Friday morning was $137.29, as shares traded for less than $120.

Get Report shares tumbled the most in ten months Friday after it posted weaker-than-expected fourth quarter revenues that marred a solid first year for the cloud-focused computer group under new CEO Arvind Krishna.

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