Sweta Killa: The technology sector has been worst hit of late on lofty valuations and forewarnings of soft earnings. This trend is likely to continue at least in the near term with disappointing Q1 results from International Business Machines (NYSE:IBM), the largest computer-services provider.
This has also heightened worries over the other traditional computing giants like Oracle (ORCL), Cisco (CSCO), EMC Corp. (EMC) and Hewlett-Packard (HPQ), which are expected to report this month or in the next. This is because enterprise spending has been on the decline, and corporations and governments are embracing software-as-a-service (SaaS) and other cloud offerings instead of in-house technology infrastructure.
IBM Results in Focus
The missing trend for revenues continued for this tech giant for eight consecutive quarters. Revenues dropped 4% year over year to $22.48 billion, and fell shy of the Zacks Consensus Estimate of $23.01 billion and represents the lowest quarterly revenue in five years. Earnings per share of $2.54 met our estimate but fell year over year for the first time in 11 years.
Sluggish demand for computer hardware and weak sales in emerging markets, including China, Brazil, Russia and India, were the major culprits of the dull performance (read: Emerging Market ETFs See Inflows: 3 ETFs to Pick).
The company is transforming its traditional business to strategic growth areas including cloud computing, Big Data analytics, social, mobile and security. However, it will take years for the company to reap full benefits and boost growth.
Despite the lackluster Q1, IBM reiterated its earnings per share outlook of at least $18.00 for the full fiscal year. Though this is slightly higher than the Zacks Consensus Estimate of $17.92, the disappointing top line continued to dampened investor mood. As a result, IBM shares fell about 4% in after hour trading yesterday.
This has raised questions on the company’s revenue growth story, leaving investors feeling bearish about this stock for at least in the near term. Further, IBM currently has a Zacks Rank #4 (Sell) and a poor industry Rank (in the bottom 36%) at the time of writing as per the Zacks Industry Rank, suggesting that more pain could be in store for this company in the near term.