Is IBM a Safe Investment?

With shares of International Business Machines (NYSE:IBM) trading around $188, is IBM an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

IBM is an information technology company. The company operates in five segments: Global Technology Services, Global Business Services, Software, Systems and Technology, and Global Financing. Technology products and services are in high demand worldwide, as consumers want to be up to speed and companies always need the latest and greatest to stay ahead of the competition. Cloud computing has been hot in recent times, which has not been good news for IBM. Should the company want to hold on to its market share, it needs to make moves quickly and provide the technology products and services that worldwide consumers and companies demand.

IBM wants to look into new ways to structure computers, reports Network World. The firm that invented numerous technological hallmarks of computing, like the hard drive and the floppy disk, wants to break the mold it helped create. The company will invest $3 billion into researching new, smaller chips that are not based on silicon. The silicon microchip is currently vital to the computer, the wired cornerstone of PCs and Macs alike. They are not only the basis of computers but also smartphones, tablets, and other computerized devices.

The company wants to restructure and rebuild computers using new systems. This shift is why the company is dedicating so much of its research and development budget to this new project. IBM is making no secret of its intention to develop this new technology. The front of its American website includes the headline “The End of Silicon?” The company’s statement goes into depth about how the company is looking into a wide variety of materials, including carbon nanotubes as possible replacement for the silicon used now.

T = Technicals on the Stock Chart Are Mixed

IBM stock has struggled to make significant progress in the last several years. The stock is currently trading sideways and may need time to consolidate. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, IBM is trading above its rising key averages, which signals neutral to bullish price action in the near-term.

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of IBM options may help determine if investors are bullish, neutral, or bearish.

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

As of Tuesday, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on IBM’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for IBM look like and more importantly, how did the markets like these numbers?

IBM has seen increasing earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have been optimistic about IBM’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has IBM stock done relative to its peers – HP (NYSE:HPQ), Oracle (NYSE:ORCL), and Microsoft (NASDAQ:MSFT) — and sector?

IBM has been a poor relative performer, year-to-date.

Conclusion

IBM is a global technology company that provides essential products and services to companies and consumers worldwide. The company will invest $3 billion into researching new, smaller chips that are not based on silicon. The stock has been struggling over the past couple of years and is currently trading sideways. Over the last four quarters, earnings have been rising while revenues have been declining, which has left investors optimistic. Relative to its peers and sector, IBM has been a poor year-to-date performer. WAIT AND SEE what IBM does next.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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