Monday, April 20, 2020

What Will IBM Pull Out of its (Red) Hat This Time?

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What’s happening: IBM is scheduled to report its first-quarter results after the closing bell on Monday, April 20.

What happened: The upcoming earnings release will be the first under IBM’s new CEO Arvind Krishna and the first quarter to reflect the impact of the coronavirus crisis.

Krishna has played a key role in IBM’s marked shift towards cloud and AI computing. The CEO now hopes to extend the company’s presence to next-gen technologies following the acquisition of acquiring open source leader Red Hat.

  • The consensus revenue estimate stands at $17.8 billion, representing a 1.8% declined from the same quarter last year.
  • The company is expected to report earnings of $1.81 per share, down from $2.25 per share in the year-ago quarter.

Why it matters: The Armonk, New York-based company surprised investors last quarter with revenue growth, after posting declines in revenue for five consecutive quarters. IBM has started to see synergies from its Red Hat purchase. Although Red Hat’s revenue surged 24% last quarter, IBM was able to post overall sales growth of just 0.1%.

IBM has witnessed strong growth in its cloud computing, security and AI-related business solutions and the momentum is expected to continue in the current quarter. The company’s cloud revenue surged 23% last quarter, contributing 27% of its total revenue.

The tech giant is making massive investments to improve its cloud-based capabilities and these expenses could hurt its bottom line. IBM is also facing stiff competition from rivals in the cloud segment, which may weigh on its overall results.

Investors are concerned about the coronavirus impact on IBM’s business, especially related to deal wins. IBM announced a partnership with the government to provide technology and resources to combat the virus. But now the outbreak is hitting the finances of various businesses, which may force these companies to cut their spending plans and lower technology-related investments.

On the other hand, with more people now working from homes, the company’s cloud solutions could be benefited by strong demand.

How the shares have performed so far: Shares of IBM have been on an upturn over the past one month, recording gains of 13%. The stock has declined by only 10% year to date, performing much better than other tech stocks. Investors are optimistic ahead of IBM’s earnings, sending to stock higher to record gains of 3.8% on Friday.

What to watch: Investors will be looking for signs of the coronavirus impact on the company’s operations. The markets are hoping for a strong performance from IBM’s cloud segment and expecting the company’s management to issue a positive guidance for the year.

The Markets Today

     

US stocks will be in focus today, with the markets rising for second consecutive week.

Context: Stocks closed higher on Friday after a Gilead Sciences drug showing effectiveness in treating the COVID-19 infection, triggering hopes of the economy reopening faster than expected.

Details: Healthcare site Stat News reported on Gilead’s experimental drug remdesivir showing promising results in the treatment of COVID-19 in 125 patients at the University of Chicago Medicine. The National Institutes of Health also disclosed the drug’s effectiveness in the treatment of monkeys infected with coronavirus.

The positive drug results grabbed investor attention as no vaccine is currently available for the fatal disease that originated in China. The coronavirus crisis has resulted in a loss of more than 22 million American jobs over the last month.

Markets also cheered the news of President Donald Trump announcing a three-phase plan to kickstart the American economy. Investors seemed to ignore the news of China’s economy shrinking by 6.8% in the first three months of the year and US leading economic indicators dropping by a record 6.7% in March.

The Dow jumped more than 700 points to close at 24,242 on Friday. The S&P 500 rose 2.68%, while the Nasdaq 100 spiked 1.38%.

Shares of Boeing climbed over 14% after the company announced plans to resume manufacturing. Procter & Gamble’s shares gained 2.6% after the company reported upbeat earnings for its fiscal third quarter.

What to watch: Investors will be looking at the daily coronavirus numbers. The number of positive COVID-19 cases in the US has surpassed 759,760 with around 40,680 deaths. Total number of positive coronavirus cases in the world has exceeded 2.4 million and caused 165,270 fatalities.

The economic calendar is light today, with the US scheduled to release only the Chicago Fed National Activity Index. The Index had climbed to 0.16 in February, versus a reading of -0.33 in the prior month.

Other Markets: European indices were trading higher at 9:00am GMT, with the FTSE 100, German 30 and French 40 up by 0.5%, 0.5% and 0.3%, respectively.

Support & Resistances
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market snapshot

     

Futures at 0400 (GMT)

News shaping
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What else to watch today

     

Canada’s wholesale sales, Turkey’s government debt and Russia’s unemployment rate, retail sales and real wage growth.