(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

IBM (IBM) shares jumped by nearly 10 percent following its quarterly earnings report. The move higher in the stock seems too much given the size of the beat, and the forward guidance. The options market is seeing the spike in the shares as likely short-term, as the underlying growth trends in IBM's business do not offer much to get excited about. 

IBM reported third-quarter revenue of $19.15 billion, about 3 percent ahead of estimates. The company has previously reported declining revenue for 22 straight quarters. EPS came in $0.03 higher than estimates at $3.30, according to Ycharts. The company provided fourth-quarter revenue guidance of around $22 billion, just slightly ahead of expectations of $21.8 billion, according to an article in Bloomberg. 

Options Short-Term Oriented

The options market is undoubtedly thinking this is going to be a short-lived rally. A good portion of the options activity is occurring for expiration on October 20. Meanwhile, the November $160 options have traded nearly 16,000 contracts on the calls, which is all short-term-oriented, betting shares will continue to rise. 

(Interactive Brokers)

Longer-Term View

Go out to January, and that options volume drops dramatically. Look ahead to March 16, 2018, and the volume is even less. The $160 strike price for the March options have an implied volatility of only 16 percent, and the long straddle suggests an 8 percent rise or fall in the price of IBM by expiration.

The expected price change is based on the cost of buying one put and one call for about $13.65. But the volume of the calls is 645 contracts, while the puts stand at only 51 contracts. The options may be slightly bullish, but certainly are showing the same enthusiasm as the equity market or the near-dated options. 

(Interactive Brokers)

Shares Are Not Cheap

IBM shares don't appear be expensive at 11.5 times 2018 earnings, but it may be too soon to say the company has completely turned. Given the company's history and declining revenue numbers, one could argue the stock is expensive at 11.5 times earnings because an investor is investing in a company that is making less money than the previous year. Why should any investor pay a multiple for that at all?

The growth rates in the business segments are not all that impressive, either. The growth in IBM's cognitive solution unit for the first nine months of 2017 is only 1 percent, while its global finance segment is flat. Otherwise, every other unit had declining sales. (See also: IBM Plans Its Blockchain Dominance.)

Too Much

A 10 percent move in the stock for a company that beat expectations by only 3 percent seems like a huge move. IBM has reported 22 quarters of declining revenue, and the expectation that it may grow again is causing outsized enthusiasm. 

They say value is in the eye of the beholder, and while IBM may be on the cusp of growing again, there is likely a better place to put one's money that offers a real growth opportunity. 


Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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