The software and cloud computing service provider, International Business Machines Corporation (NYSE: IBM), recorded a yearly high of $164.95 in mid-August, following the fiscal 2016 second-quarter results that topped analysts’ estimates. Considering the strong growth in the cloud computing business and its future prospects, the market cheered the company’s performance. However, we believe that the rally for IBM has ended as of now, due to the reasons provided below. IBM ended Wednesday’s trading session at $161.64.
The Armonk, North Castle (NY)-based company reported second-quarter revenue of $20.24 billion, down from $20.81 billion in the corresponding quarter last year. IBM’s second-quarter revenue topped the analysts’ estimates of $20.03 billion.
For Q2 2016, the company posted a net income of $2.50 billion or $2.61 per share, down from $3.45 billion or $3.50 per share in Q2 2015. Excluding costs, the non-GAAP income for the second quarter was $2.84 billion or $2.95 per share, compared to $3.79 billion or $3.84 per share in the second quarter of fiscal 2015. The analysts surveyed by Thomson Reuters anticipated earnings of $2.89 per share.
For fiscal 2016, the company anticipates earnings of $13.50 per share, down 9.5% from the full year 2015. The first-quarter EPS was 19% lower than last year. Likewise, the second-quarter EPS was 23% below Q2 2015. Based on the FY16 EPS view, we estimate that only 40% of the earnings have come so far at the end of the second quarter. Thus, it is not going to be easy for IBM to achieve its fiscal 2016 EPS outlook.
Furthermore, this is the 17th straight quarter of decline in the revenue. Even though the company managed to beat the analysts’ earnings estimate, it should be noted that the earnings continue to decline on a y-o-y basis. Only the Cognitive solutions segment posted a 3.5% y-o-y revenue growth out of the five business segments. The Systems segment’s revenue plunged 23.2% on a y-o-y basis. IBM is in the middle of transforming itself completely. The company has to grow further in the new generation business such as Cognitive computing to offset the revenue losses realized in other segments.
The stock is unable to cross above the level of 162 and is currently in a downtrend. With a reading below 100, the momentum oscillator indicates bearishness in the scrip. Currently, the path on the downside has the least resistance. Thus, it is imperative that the stock would slide to the next support level of 153.
A binary trader can take advantage of the probable downtrend in the share price by purchasing a one-touch put option from a suitable binary broker. The target level for the put option should be $153 or higher. Likewise, the choice of contract expiry date should be in the first week of October.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
