IBM's stock just surged almost 10%, and Morgan Stanley thinks the company is at an 'inflection' point

IBM Ginni RomettyIBMIBM CEO Ginni Rometty
  • IBM’s stock surged nearly 10% on Wednesday following a better-than-expected earnings report.
  • Morgan Stanley sees reasons to be hopeful about the company, but other analyst firms are less optimistic.
  • The company’s revenues declined for the 22nd consecutive quarter.

The future may be looking brighter for IBM.

The venerable tech company’s stock rallied early Wednesday and was up as much as 10% after its latest earnings report beat Wall Street’s expectations and showed what some see as promising momentum.

IBM’s third quarter results could mark an “inflection” point, Morgan Stanley financial analyst Katy Huberty said in a report issued Wednesday. The company’s “organic” revenue growth — what it produced from building on its own products and services — and the fact that its gross margins — the difference between what a company charges customers for its products and services and its direct costs of producing and providing those products and services — declined less than they had been falling are signs the heretofore declining tech company could stage a successful rebound, she said.

The company’s “results were better than expected,” said Huberty, who reiterated her overweight rating and $US192 price target on IBM’s shares. She continued: “Low investor expectations and ownership set-up for a re-rating as fundamentals recover post a period of investment.”

Investors seemed to share Huberty’s bullishness. After closing regular trading on Tuesday before the company’s earnings report at $US146.54 a share, IBM’s stock opened at $US157.12 a share on Wednesday and hovered around $US160 by mid-afternoon.

It was a positive omen for the company, which, despite beating analysts’ expectations, reported its 22nd consecutive quarter of declining revenue. In the third quarter, IBM posted sales of $US19.15 billion, which was down from $US19.23 billion in the year-ago period, but above Wall Street estimates of $US18.59 billion.

IBM’s performance should improve if it acquires more customers in the cloud and uses its newly released z System mainframe to drive growth, Huberty wrote.

But even Huberty noted that IBM is in a transition period and success in the cloud, which provided 20% of the company’s revenue in the third quarter, won’t be easy. IBM runs the risk of its cloud business cannibalising its core offerings, Huberty wrote. If the company isn’t able to start making money off its investments in its Watson artificial intelligence technology and its other cognitive computer systems, that could hurt the company’s profit margins, she said.

IBM’s cloud services likely won’t be able to compete with Amazon Web Services or Microsoft Azure on price, Huberty said. But its various cloud service offerings ought to help it retain customer sales dollars. And those services could potentially offer better-than-expected margins, she said.

“Can IBM win the cloud game? Not how you think,” she said.

Other analysts weren’t as optimistic. At least seven financial analysts have hold ratings on IBM’s stock. And at least two rate it as a sell.

Industry analyst Patrick Moorhead of Moor Insights and Strategy, was also cautious on IBM’s prospects. There are positive signs, he said. But he worried about the slow growth IBM’s cognitive systems area recorded. That business’ sales grew by just 3% in the third quarter, compared to 10% growth in hardware. Because cognitive systems is a new business for IBM, it should be growing much faster, Moorhead said.

But IBM’s not alone in struggling to transform itself from a traditional enterprise technology company to one that emphasises cloud, mobile, and other products, he said.

“HPE, Cisco Systems, and Dell EMC are in a very similar position,” Moorhead said.

Get the latest IBM stock price here.

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