Dow component International Business Machines Corporation (IBM) is trading lower by about 3% in Tuesday's pre-market session, despite meeting third quarter 2020 top- and bottom line-estimates. Revenue fell 2.8% year over year to $17.56 billion, marking the third straight quarter of declines, triggering a sell-the-news reaction that canceled out improving sentiment following the company's recent spin-off news.
- IBM stock has been stuck in a major downtrend for more than seven years.
- The company met estimates, but revenue declined for the third straight quarter.
- The stock is now trading below the price posted prior to the spin-off news earlier this month.
The old-school tech giant announced on Oct. 8 that it would spin off the Global Technology Services unit into a separate company, setting off a high-percentage rally that lifted the stock to a four-month high. However, investors had second thoughts after realizing that the transaction won't close until the end of 2021, triggering an exodus that has now dumped IBM stock below the price it was trading prior to the news. This bear trap could weigh on price action in coming weeks.
Revenue from the unit designated for spin-off fell 4% year over year, even though the $6.46 billion contribution to income beat analyst estimates, adding to downside pressure. The company didn't offer guidance during the release but targeted "sustainable mid-single digit revenue growth over the medium term" during the announcement. The quarterly results are likely to reduce confidence in that prediction.
Wall Street is skeptical about IBM's long-term outlook, with a consensus "Hold" rating based upon three "Buy," six "Hold," and one "Sell" recommendation. Price targets currently range from a low of $115 to a Street-high $155, while the stock is set to open Tuesday's session just $4 above the low target. Given this placement, Monday night's mixed results could trigger additional downgrades and lowered price targets.
In a spin-off, the parent company distributes shares of the subsidiary that is being spun off to its existing shareholders on a pro rata basis, in the form of a special dividend. The parent company typically receives no cash consideration for the spin-off. Existing shareholders benefit by now holding shares of two separate companies after the spin-off instead of one. The spin-off is a distinct entity from the parent company and has its own management.
IBM Monthly Chart (1999 – 2020)
The stock topped out above $138 in 1999 following a multi-year uptrend and sold off, entering a volatile trading range with support in the $80s. It broke down in 2002, bottoming out at a four-year low in the $50s a few months later. A bounce into mid-decade settled below new resistance, ahead of a breakout that stalled below the prior high in 2008. It held 2005 support near $70 during the economic collapse and bounced into the new decade, mounting the prior century's peak in 2010.
The rally booked impressive gains into 2013's all-time high at $215.82, ahead of a virulent downtrend that has carved seven years of lower highs and lower lows. The stock fell to a 10-year low during the first quarter's pandemic sell-off and bounced, reversing at the 200-month exponential moving average (EMA) in June. It turned tail at that formidable barrier a second time after the spin-off news, indicating that the downtrend remains fully intact.
Short-term support near $116 should hold for now, suggesting modest downside potential after Tuesday's opening bell. Larger-scale support lies near $100, where the trendline of lows going back to 2002 comes into play. In turn, that predicts IBM could test the deep March low, but is unlikely to break that level in coming months. In addition, buying interest from the spin-off should finally kick into gear once again in the first or second quarter of 2021.
Support, or a support level, refers to the price level that an asset does not fall below for period of time. An asset's support level is created by buyers entering the market whenever the asset dips to a lower price.
The Bottom Line
International Business Machines stock is trading lower after another quarter of declining revenue, but short-term downside risk appears limited.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.