Updated 7/19/13, 9:00AM HST
Analysis of IBM Second Quarter Business
Quo Vadis, Big Blue?
IBM 2Q Preview: They say, "once burned, twice shy;" On
Wall Street, it apparently takes five times
July 19, 2013 - There is at least one good thing IBM had going for itself
leading up to its second quarter earnings release July 17. Its stock did not
have that much more to fall. It appears the market has already built the 2Q
announcement fallout into the price. They say, "once burned, twice shy." On
Wall Street, it apparently takes five times.
Ever since April 2012, Big Blue shares have been dipping after each
quarterly release. It was just a matter of how deep and how fast. And then
wishful thinking would return. Which is why the IBM stock chart looks like a
The main reason, of course, has been the company's lack of revenue growth.
The profits have been good. But you can't keep living off financial
engineering forever. We warned about that in Apr 2012 (Big Blue Feet
of Clay). Eventually, you have do sell
something tangible, buy something exciting.
Which is actually what IBM did in early June. It acquired SoftLayer, a
company that specializes in Cloud-based solutions. Big Blue hopes SoftLayer
will accelerate its ability to integrate public and private clouds.
At the same time, IBM announced formation of the new Cloud Services division
under Erich Clementi, Senior IBM VP. The new division incorporates IBM's
existing cloud offerings and those of SoftLayer. IBM expects to reach $7
billion in Cloud revenue by 2015 (see
Watson, Labs: Key to
IBM Future, Annex's 3-Year Forecast for
Obviously, this is a step in the right direction. But how will it help the
second quarter? It won't. The SoftLayer deal does not even close till the
3Q13. Besides, even at $7 billion, the Cloud is still a tiny part of IBM's
Which is why investors seem to be bracing for another disappointment. At
least this time, Wall Street has not set the bar very high.
Alas, a fair warning. The foregoing analysis is based on logic and REASON.
Which is not at all helpful these days on Wall Street.
"Where ignorance is bliss, 'tis folly to be wise," Cambridge
University professor and poet
Thomas Gray wrote
some 250 years ago. He must have been extremely prescient. Because his
famous quote describes perfectly the current state of affairs on Wall
reason at the door," perhaps the sign above the New York Stock Exchange
should read. "You are entering a House of Greed."
of course, has no room for wisdom. So back to Thomas Gray (1716-1771).
IBM And The Media Attempt To Obscure Its
Declining Business Results
It appears this writer is not
the only one who thinks IBM is relying on what I call "financial
engineering" to make itself look better than it is. Check out this piece
from Seeking Alpha (see the link below). I could have written it. But
chose not to. Because it would have been repetitive.
"IBM is now a different beast from that which it once was. Its sales
have been anemic for some time. Yet it is so committed to earnings
"growth" that it overtly asks us to ignore basic arithmetic and
basic accounting principles, in order to create a false picture of
its operations, as I will attempt to show below based on Wednesday
afternoon's earnings release.
This behavior is opposite to its prior image and antithetical to its
obligations to investors. Worse, because no analyst has missed the
reality of a downturn in IBM's businesses, the only people fooled by
clever press releases and fawning media attention will be casual
retail investors who believe the headlines that IBM had a good
quarter and is truly doing better than the smart money had expected.
In fact, IBM has had a poor quarter and a poor first half, but just
does not want to admit it."
But the Seeking Alpha article's author was wrong though when he
blamed the media for the IBM stock's miraculous rise despite
disappointing results. He should have pinned it on moral corruption
of Wall Street. Why?
Because the IBM stock had already moved up five points in after-hours
trading even just as the IBM teleconference with analysts was getting
under way. The media had had no time to write their stories as yet. But
the analysts did have a chance to call or text their trading desks. I
saw firsthand how that was done back in the 1990s when IBM used to do
"live" earnings announcements in New York.
Being stupid is not a sin. If someone tries pulls the wool over your
eyes, shame on deceiver, not you. But if your eyes are wide open and you
let it happen, as these Wall Street analysts did, that's moral
corruption. And that needs to be highlighted.
Originally, I thought I
would refrain from commenting about yet another disappointing IBM
quarter lest I sounded repetitive. But after I had seen this SeekingApha
piece, I felt it was necessary to chime in with my own two-cents' worth.
Little did I know that the next day, Wall Street would provide more
fodder for my publishing canon...
Who is manipulating the IBM
What a difference a day makes! A day after IBM stock moved up
five points despite its disappointing 2Q results, the Big Blue shares
dropped right back to where they started. As I write this, they are trading
around $194. (They closed at $193.54, down nearly five points, slightly
below the pre-earnings release close on Thursday).
Which begs the question: Who has been manipulating the IBM stock? Probably
someone who needed a nice five-point bounce up in order to unload gobs of
the stock that's not likely to go anywhere any time soon. Indeed,
yesterday's volume of IBM shares went through the roof. It was more
than double the daily average.
If the SEC computer does not pick up this kind of an "anomaly," and the
government agency does not launch an investigation to see if they can figure
out who and how manipulated the IBM stock in the last two days, then they
will be simply a part of the problem. The SEC will be another reason why
people should check reason at the door before trusting Wall Street with
Volume XXIX, Annex Bulletin 2013-05
July 19, 2013
Bob Djurdjevic, Editor
(c) Copyright 2013 by Annex Research,
Inc. All rights reserved.
The copyright-protected information contained in the
ANNEX BULLETINS is part of the Comprehensive Market Service (CMS). Reproduction
by any means is prohibited..
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