IBM Q2 earnings preview: can the tech giant’s cloud revenue keep growing?

When is IBM set to report their next set of results?

International Business Machines Corporation (IBM) is set to report their second quarter FY20 results next Monday, 20 July.

The analyst view remains mixed

Heading into IBM's second quarter results release, analysts remain mixed on the tech giant, with the stock commanding a Hold rating on average, according to MarketWatch.

That view looks well reflected in the average analyst price target on IBM – which currently stands at US$129.00 per share – implying some upside potential from current price levels, also according to MarketWatch.

This comes after IBM delivered a middling set of results in the first quarter, as overall revenue, net income and earnings per share (EPS) all declined. Specifically, the company saw its Q1 revenue fall by 3.4% to US$17.6 billion, while operating (non-GAAP) diluted earnings per share and net income both came in 18% lower at US$1.84 per share and US$1.6 billion, respectively.

Mind you, while the Group’s sales and earnings fell overall during the last quarter, IBM’s cloud division proved resilient, posting strong growth in spite of the challenging operating environment, with total cloud revenue rising 19% to US$5.4 billion.

Red Hat – which IBM acquired for US$34 billion in 2019 – also continued to grow at a solid rate in Q1, with revenue rising 18%.

Following this robust showing in the first quarter, IBM’s Cloud & Cognitive Software business segment will likely be closely watched by investors during the upcoming earnings release.

‘Our first-quarter performance in cloud is a reflection of the trust clients place in IBM's technology and expertise today, and positions us to continue building an enduring hybrid cloud platform for the future,’ said IBM's Chief Executive, Arvind Krishna.

While IBM continues to struggle with growth, the company maintained strong margins during the prior quarter – a trend investors will likely be keen to see remain in tact as we head into the Q2. Here, IBM's gross profit margins for its Cloud & Cognitive Software business hit 75.4%, while its Global Technology Services gross margins reached 34.0%. Overall, gross profit margins remained steady in the first quarter – at 45.1%.

Unsurprisingly, as part of the Q1, IBM’s management withdrew its full-year guidance as a result of elevated levels of uncertainty caused by the coronavirus pandemic. Even so, it was flagged that the company would ‘reassess this position based on the clarity of the macroeconomic recovery at the end of the second quarter.’

IBM share price: recent performance in focus

Finally, while IBM has seen its share price trade well off the lows it recorded in March – rising close to 30% in that period – the stock's longer-term trend remains a negative one.

Indeed, in the last six months IBM’s stock is down ~10% and in the last five years the tech stock is down close to 30%.

IBM last traded at US$124.01 per share.

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