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IBM Stock Fairly Valued At $187 Going Into Earnings

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IBM, the world's largest IT services and enterprise software firm, is set to release its Q4 2011 earnings today.

The past year was a good one for IBM, as the stock price increased by more than 25% while competitors like Oracle, Microsoft, and Hewlett-Packard all generated negative returns for the year.

In the third quarter, however, Big Blue reported disappointing signed service contracts, an indication of future business, and a sequential decline in the company’s backlog, which measures the current value of work under contract. These indicators raised concerns about the negative impact of weak global economic conditions on technology spending and thus IBM’s next few quarters.

We currently have a $187 price estimate for IBM’s stock, about 5% above the market price. Below we look that the major factors to look at in the IBM earnings release.

See our full analysis of IBM

IBM vs Grim Macroeconomic Outlook

Recent numbers from research firm Gartner indicate that IT spending will likely be hit by uncertainty in Europe in 2012, with growth in the enterprise software and IT services businesses to be hurt the most. (See Europe Will Drag on IT Spending in 2012) This is not a good sign for IBM. In addition to Gartner’s forecast for 2012, last month’s disappointing quarterly results from Oracle, a technology bellwethers, raised investor concerns that economic uncertainty could be hurting enterprise spending on technology.

In spite of concerns regarding IT spending and the stock’s meteoric rise in 2011 (on a relative basis of course), most analysts still maintain a strong buy/outperform rating for IBM.

IBM's revenue decreased slightly in Q3 2011 after increasing for four consecutive quarters before that. However, the company's profit has been steadily on the rise. It will be interesting to see whether IBM manages to surprise investors this time around or if the macroeconomic outlook has finally become too grave to buck industry trends.

IBM’s Strategy to Remain the Same Under New CEO

IBM has been very focused on its Smarter Planet initiatives of late and has released a number of new solutions targeting various different industries as part of the initiative. At its core, these solutions are based around IBM's industry-leading analytics, which help clients refine their processes by utilizing the data available to them or that they are able to capture using IBM’s new solutions.

These initiatives have done well so far, as evidenced by IBM's performance over the past quarters. Virginia Rometty, who recently took over as CEO, also confirmed that analytics will be the single most important focus area for the company in 2012. (See IBM's 2012 is All About Analytics)

However, given IBM’s acquisition spree over the last few months, a few new announcements around products and solutions should also be expected.

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