On Tuesday, for the 22nd successive quarter, International Business Machines Corporation (NYSE: IBM) reported a decline in the fiscal 2017 third-quarter revenues, compared with the similar period of fiscal 2016. However, the company was able to beat the Wall Street estimates. Considering the impressive growth in the cloud and cognitive computing segment, rise in the sales of the new Z System mainframe, and better-than-anticipated fiscal 2017 earnings outlook, we forecast a short-term recovery in the stock price.
The New York-based company reported 3Q17 revenues of $19.153 billion, a decrease of $73 million from $19.226 billion in 3Q16. The September quarter 2017 revenues were better than analysts estimate of $18.59 billion. During the recent quarter, IBM recorded GAAP net income of $2.726 billion, or $2.92 per share, compared with $2.853 billion, or $2.98 per share, in the year-ago period. Excluding charges, the Q3 2017 non-GAAP earnings of $3.30 per share were better than analysts estimate of $3.28 per share.
Segment-wise, Cognitive solutions revenue grew $165 million y-o-y to $4.40 billion. Global business services revenue was $4.093 billion, down 2.3% from last year. Technology Services & Cloud Platforms revenue was $8.457 billion in Q3 2017, compared with $8.748 billion in the third quarter of 2016. Aided by a boost in the sales of the new Z System mainframe, Systems revenue increased $179 million on a y-o-y basis to $1.721 billion. All the major business segments of IBM exceeded the FactSet analysts’ estimates.
IBM continues to depend on strategic imperatives (analytics, mobile, cloud, and security) for its growth. In fact, during the third quarter, the company generated 46% of its total revenues from strategic imperatives. Free cash flow during the quarter was $2.50 billion. The company also disbursed $1.40 billion to investors in the form of dividend payments. IBM finished the third-quarter with $11.50 billion cash in hand.
During the quarter, the company set aside $240 million to set up an artificial intelligence research lab in cooperation with Massachusetts Institute. IBM also announced a blockchain-related collaboration with Dole, Unilever, Kroger, and Walmart. Further, the company stated that it expects earnings of $13.80 per share in fiscal 2017, above the Thomson Reuters Consensus estimate of $13.75 per share.
Technically, the stock has broken the resistance at 153, as shown in the image below. The stochastic indicator is moving out of the bearish zone. Thus, we expect a short-term uptrend in the stock.
To benefit from the probable appreciation in the stock price, we may invest in a call option as long as it has a validity period of one week. Yet another condition to be satisfied for investing in the option contract is the stock should trade near $155.
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