Is IBM Worth Investing In?

With shares of International Business Machines (NYSE:IBM) trading around $178, is IBM an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

IBM is an information technology company. The company operates in five segments: Global Technology Services, Global Business Services, Software, Systems and Technology, and Global Financing. Technology products and services are in high demand worldwide as consumers want to be up-to-speed, and companies always need the latest and greatest to stay ahead of the competition. Cloud computing has been hot in recent times, which has not been good news for IBM. Should the company want to hold on to its market share, it needs to make moves quickly, and provide the technology products and services that worldwide consumers and companies demand.

IBM is swiveling to win over a new market in the competition — India — and attacking Amazon (NASDAQ:AMZN) via ads is a major strategy, according to the Economic Times. Amazon’s new effort in India comes in the wake of a losing a federal contract worth $600 million to Amazon. The contract was with the Central Intelligence Agency. IBM contested the contract in court, trying to claim it for itself — but the court ruled that the contract remain with Amazon.

T = Technicals on the Stock Chart Are Mixed

IBM stock has struggled to make significant progress in the last several years. The stock is currently pulling back from highs for the year and may need time to consolidate before heading higher. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, IBM is trading below its rising key averages, which signal neutral to bearish price action in the near-term.

IBM

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of IBM options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

IBM Options

18.33%

80%

78%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

December Options

Steep

Average

January Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on IBM’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for IBM look like and more importantly, how did the markets like these numbers?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

10.51%

11.40%

3.45%

11.15%

Revenue Growth (Y-O-Y)

-4.15%

-3.33%

-5.11%

-0.64%

Earnings Reaction

-6.37%

1.76%

-8.27%

4.40%

IBM has seen increasing earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about IBM’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has IBM stock done relative to its peers, HP (NYSE:HPQ), Dell (NASDAQ:DELL), Microsoft (NASDAQ:MSFT), and sector?

IBM

HP

Dell

Microsoft

Sector

Year-to-Date Return

-6.59%

77.30%

36.69%

41.03%

38.10%

IBM has been a poor relative performer, year-to-date.

Conclusion

IBM is a global technology company that provides essential products and services to companies and consumers worldwide. The company is swiveling to win over a new market in the competition. The stock has been struggling over the last couple of years and is currently pulling back. Over the last four quarters, earnings have been rising while revenues have been declining, which has produced conflicting feelings about IBM’s earnings announcements. Relative to its peers and sector, IBM has been a weak year-to-date performer. WAIT AND SEE what IBM does this coming quarter.

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