Key Takeaways
- IBM is expected to post adjusted fourth quarter earnings of $3.59 per share after Wednesday’s market close.
- Revenue is expected to slip 2% while growing in constant currency terms.
- Shares outperformed all large-cap techs in 2022 thanks to IBM’s defensive positioning.
- Big Blue relies primarily on recurring revenue from managing essential computer systems and networks for large enterprise clients.
Information technology provider IBM (IBM) heads into its earnings report after Wednesday’s closing bell having handily outperformed glitzier tech bellwethers over the past year, an unusual position for a technology pioneer that has badly lagged the sector in returns over the longer term.
IBM should post fourth-quarter adjusted earnings of $3.59 per share, up from $3.35 per share a year earlier, while revenue may have slipped 2% to $16.4 billion, according to analysts’ estimates compiled by Visible Alpha.
IBM’s defensive positioning as a provider of essential enterprise IT software and services with a high proportion of recurring revenue has propped up the share price but will be tested by the recent slowdown in tech spending.
Shares have gained almost 10% over the past year, compared with a 13% decline for the S&P 500 Information Technology Sector Index (see chart below). IBM also has returned 4.6% of its recent share price in dividends over the past year vs. the index dividend yield of 0.7%. Over the past five years, however, the index has gained 96% while IBM shares are down 11%.
While Big Blue’s sales stagnated for years, third-quarter revenue was up 15% on a constant currency basis after accounting for IBM’s spinoff of its declining managed infrastructure services business as Kyndryl (KD) in late 2021. On the same constant currency basis, IBM projected annual revenue growth “above its mid-single digit model” along with $10 billion in full-year 2022 free cash flow when it released third-quarter results.
Wall Street’s Split Verdict
The company’s 5% growth goal is at risk in 2023 as is the stock’s recent outperformance amid expected “early cycle dynamics” favoring faster growth companies later this year, Morgan Stanley analysts warned last week in downgrading IBM shares to equal weight from overweight.
Bank of America, by contrast, reiterated its Buy rating on IBM the same day, citing a growth turnaround, improved cash generation, defensive business positioning, and an “attractive” dividend yield. “We expect shares of IBM to outperform in a weaker macro backdrop on an improving fundamental story,” BofA analysts wrote.
Also last week, Evercore ISI added IBM to its “tactical outperform list” ahead of earnings, citing its recurring revenue and enterprise clientele as advantages in a downturn. While dollar strength has recently hurt revenue and earnings, that strength has since reversed and should serve as a tailwind in the fourth quarter and 2023, according to Evercore’s analysts.
IBM Share Price vs. S&P 500 IT Sector Index, Past Year
Source: TradingView.
IBM Key Stats
| Estimate for Q4 FY 2022 | Q4 FY 2021 | Q4 FY 2020 | |
| Adjusted Earnings Per Share ($) | 3.59 | 3.35 | 1.88 |
| Revenue ($B) | 16.4 | 16.7 | 15.7 |
Source: Visible Alpha