Before you read the three letters, IBM (NYSE:IBM), and cut bait please, wait. No doubt, Big Blue, which reports Q1 earnings today after the close, appears to have lost a lot of its relevance in a cloud computing world. And IBM stock has lost much of its luster over the past few years as a result. Despite benefiting lately from a rotation into value plays and a spin-off of its underperforming services business, there’s not much sizzle here. But some of what IBM says tonight does matter.
Investors who pay attention will be rewarded with some scoop on Palantir (NYSE:PLTR) and Microsoft (NASDAQ:MSFT), two tech growth stocks clearly on the move. Here’s a cheat sheet on what to expect, and why it matters.
When IBM reports earnings tonight, investors can expect CEO Arvind Krishna to provide evidence that the company’s turnaround is gaining steam. Krishna hopes to be the next Lou Gerstner, guiding the company through its third major tectonic shift: hybrid multi-cloud. Heralded as the architect of IBM’s transformative $34 billion acquisition of open-source provider Red Hat, Krisha has been at the helm for two years now.
He’s done a decent job. But IBM is still woefully behind.
The shift to cloud caught the company off guard. Because IBM’s business had been based on selling a “stack” of hardware, software, services and consulting, Cloud effectively imploded the company’s value proposition. By reducing the need for on-site equipment, cloud has struck a massive blow to computing hardware sales and margins. The result? A 10-year revenue slump.
Cloud: Probably Boring But a Good Barometer
What to listen for: IBM has a lot of explaining to do. With IBM stock having rallied from about $115 back in January to around $132, the market is taking a cautious attitude with today’s earnings results. Krishna promises to return value to shareholders via its cloud ambitions. But IBM hasn’t earned a higher multiple, despite the Red Hat acquisition, which was expected to modernize the cloud business.
Expect IBM to talk up its Cloud business, with (hopefully) some anecdotal comments on the general tone of business.
Why it matters: IBM should have good stuff to say about its “hybrid” cloud strategy, which allows some information to be stored on rival cloud networks Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT). Unfortunately, whatever we hear is still going to sound like a lone tree falling in the forest. Microsoft also changed the conversation entirely in a $20 billion bid for AI and voice provider Nuance Communications (NASDAQ:NUAN).
IBM can’t hold a candle to MSFT right now, but even lip service serves to reinforce Microsoft’s leadership.
Palantir Alert: Expect Some Good “AI” Data Points
What to listen for: IBM’s earnings commentary will give insight into Palantir’s government business (56% of 2020 sales). In March, the two companies rolled out Palantir for IBM Cloud Pak for Data. The package combines IBM’s hybrid cloud data platform with Palantir’s Foundry analytics software. The partnership allows users to build and deploy AI-infused applications with IBM’s Watson, the company’s artificial intelligence computing platform. For Palantir, this is a way to get its hooks into more traditional government customers for retrofit business. The hope is that over time, Palantir incorporates its AI solutions into new business.
Expect IBM to comment on this partnership, as it supports IBM’s growth strategy of digitizing its legacy government business.
Why it matters: PLTR stock has rocketed 126% over the past 12 months. But, it has been in relative limbo lately (flat year-to-date). Bears are starting to build a case for over-extended valuation and narrowing growth drivers. The company relies heavily on its existing government business, most of which consists of U.S. Army contracts won two years ago. For the stock to work, Palantir will have to start seeing more success in its commercial business. While this segment still grew 20% last year, it’s well below government growth at 77%.
Ultimately, Palantir’s consolidated revenue growth target of 30% could prove aggressive if the entire business isn’t firing on all cylinders.
The Skinnier IBM Stock Is a No-Risk Buy
What to listen for: IBM is spinning-off its managed cloud services business, to be named Kyndryl, (“kyn” for “kinship,” and “dryl” for “ tendril”). By spinning off its largest and worst-performing segment, the “new” IBM (60% of the pre-spin consolidated company) will see improved top- and bottom-line performance. It will also get an improved balance sheet, with IBM offloading some of its excessive debt stemming from the Red Hat acquisition to Kendryl. The hope is that this leaner IBM can return to top-line growth.
A skinner version is expected to see revenue in the mid single-digit range in 2022 and beyond. While this view will probably prove out, things will move slowly.
Why it matters: Despite the perception of IBM stock as a classic value trap, there could be some upside. If you want to park money somewhere safely, IBM stock, which is supported by a 4.9% dividend yield, is a buy. But I’d only put a small amount of money to work here. There are far better tech growth prospects elsewhere — specifically Kyndril’s competitors: Cloud giants Amazon (Amazon Web Services), Microsoft (Azure) and Google (Google Cloud).
On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.
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