IBM (NYSE: IBM) Rally Gets Fresh Legs

A 4% jump on a day when most of the market was selling off made shares of IBM (NYSE: IBM) among the best performers in Tuesday’s session. It also means they’re now up more than 15% in just a month, as they start to break out of the sideways range they’d traded in for much of the past year. 

The catalyst for this pop was the company’s Q1 earnings, released after the bell on Monday. EPS was comfortably ahead of analyst expectations and even though revenue was close to flat year on year, it was still ahead of the consensus. 

Bullish Comments

CEO Arvind Krishna struck a bullish tone when he looked back on the first quarter’s performance. He noted how “strong performance this quarter in cloud, driven by increasing client adoption of our hybrid cloud platform, and growth in software and consulting enabled us to get off to a solid start for the year. While we have more work to do, we are confident we can achieve full-year revenue growth and meet our adjusted free cash flow target in 2021.”

In a similar vein, CFO James Kavanaugh remarked on how “with strong cash generation and disciplined financial management, we increased investments in our hybrid cloud and AI capabilities, while significantly deleveraging in the quarter and supporting our commitment to a secure and growing dividend.”

Wall Street is clearly buying into the positivity, with the pre-earnings run now looking likely to be followed up with a post-earnings rally. Considering IBM is a $120 billion tech company trading at a comparatively low price-to-earnings ratio of 23, it’s going to be attractive to any tech-leaning investors that are looking to stay away from tech names trading with lofty valuations. 

All the more so as this is the first quarter in five that posted positive revenue growth. IBM has garnered a somewhat negative reputation in recent years as a big and bulky technology company that’s going nowhere fast. The bears love to point to the thirty-odd years that the stock traded sideways for in the second half of the last decade, but it’s important to remember that it’s had several three-digit percentage rallies in recent years too. 

While shares have been stuck in a downtrend since 2013, there are signs that they’re on the verge of breaking through the sloping resistance. We can see on the monthly chart that lower highs have been consistently set in the eight years since they traded above $200. This current pop puts shares right up against that downward line and if they can maintain their current momentum to push on through, the bulls would have some technical as well as fundamental reasons to be excited. 

Turning The Ship

The sell-side heavyweights have been watching closely and several of them were out in recent days with bullish comments on IBM’s near and long-term prospects. BMO upped their price target on the stock to $150 in the wake of Monday’s release, which suggests upside of around 10% from current levels. The folks over at Stifel also upped their price target, whilst reiterating that they were waiting on more positive signs that IBM’s strategy was working before they row in completely behind management. 

To be sure, IBM has some work to do before it can shake off that reputation and truly put itself in the same field as today’s tech giants like Microsoft (NASDAQ: MSFT). But if it can continue moving the needle and getting a run of good quarters behind them, there’s no reason we won’t be seeing a solid uptrend rather than a downtrend. Shares can only take it one day at a time, but they’re moving in the right direction with some genuine fundamental and technical drivers behind them.

Investors getting involved are buying into the long-term potential of a stock that’s trading pretty cheap compared to some of its peers, and one that can offer a juicy 4.7% dividend yield to reward them for their patience too.