International Business Machines Corporation (IBM) is trading lower by more than 9% in Friday's pre-market after beating fourth quarter 2020 profit estimates while falling short on revenue. The troubled tech icon earned $2.07 per share during the quarter, $0.19 better than expectations, while revenue fell 6.5% year over year to $20.37 billion, missing consensus estimates by $250 million. Total cloud revenue rose 10%, much lower than rivals and a giant step back from the third quarter's 19% growth. 

Key Takeaways

  • IBM has sold off after missing fourth quarter revenue estimates.
  • Cloud revenue growth deaccelerated from 19% in the third quarter to 10% in the fourth quarter.
  • Other major divisions reported revenue declines.
  • The selloff could end around $115 and offer a buying opportunity.
  • A spinoff of slow-moving divisions could attract speculative interest later this year.

Business Services, Technology Services, and Systems revenue all fell year over year, highlighting IBM's perennial failure to compete in the tech marketplace. The company is taking steps to rebuild growth, spinning off of its Managed Infrastructure Services (MIS) business into a publicly traded entity, in a transaction expected to close at the end of 2021. In addition, a three-month acquisition binge has scooped up fast-growing cloud and fintech firms TruQua Enterprises, Instana, Expertus Technologies, Nordcloud, 7Summits, and Taos Mountain.

The spinoff will affect slow-growing legacy operations, allowing the company to focus on rapidly-growing cloud and artificial intelligence businesses. It's hoped the new slimmed-down IBM will command a much higher multiple than the old-school tech behemoth, marking the company's most important initiative in decades. However, cloud growth concerns could affect sentiment heading into the break-up, given fourth quarter deacceleration.

Wall Street has taken a cautious stance on IBM since the spinoff was first announced in October, maintaining a "Hold" rating based upon five "Buy," nine "Hold," and two "Sell" recommendations. Price targets currently range from a low of $115 to a Street-high $165, while the stock is set to open Friday's session just $6 above the low target. This depressed placement may not ease short-term downside, given the 10-point sell gap.

Tip

A spinoff is the creation of an independent company through the sale or distribution of new shares of an existing business or division of a parent company. The spun-off companies are expected to be worth more as independent entities than as parts of a larger business. When a corporation spins off a business unit that has its own management structure, it sets it up as an independent company under a renamed business entity.

IBM Monthly Chart (2010 – 2021)

Chart showing the share price performance of International Business Machines Corporation (IBM)

TradingView.com

The stock broke out above the 1999 high at $139.19 in 2010 and posted impressive gains into 2013, when the uptrend ended at an all-time high near $216. It broke down from a double top pattern a few months later, entering a brutal decline that tested the breakout level successfully in 2016. The subsequent recovery wave recouped about half the loss and rolled over, posting the next lower high in an endless series that has now stretched across seven years. 

The bottom dropped out in the first quarter of 2020, dumping the stock into support at an ascending trendline going all the way back to 2002. The descending trendline of lower highs is opposing this shallow uptrend, generating a massive triangle pattern that will hit an apex in just two years. In turn, a breakout would require a rally above $150, while a selloff through the March 2020 low at $90.56 would be catastrophic for remaining bulls.

The monthly stochastic oscillator is engaged in an active buy cycle, predicting that selling pressure will end quickly. However, that won't help shareholders in the short term, with Friday's gap triggering instant losses. The small black trendline of recent lows looks like strong support, offering a potential long-term buying opportunity around $115. In any case, IBM will need to do a much better job selling the spinoff in coming months to attract speculative interest.

Tip

A triangle is a chart pattern, depicted by drawing trendlines along a converging price range, that connotes a pause in the prevailing trend. Technical analysts categorize triangles as continuation patterns.

The Bottom Line

IBM is selling off on Friday after missing revenue estimates and reporting underwhelming cloud growth. 

Disclosure: The author held no positions in the aforementioned securities at the time of publication.