Summary
Management is showing strong confidence with Q2 revenue growth.
This optimism lacks balance: cloud, hardware, and consulting support this growth while all the other areas are still stagnating.
If margins keep on improving during the next quarters, the share price will translate into higher valuation.
This is our best constant currency growth in seven years.
- Jim Kavanaugh, CFO IBM
The IBM (IBM) management rightfully highlighted the encouraging 2% revenue growth for Q2 2018; however, a closer look at segments implies a different interpretation of the results.
The revenue growth is mainly related to the cloud, hardware, and consulting. All the other segments languish. Moreover, the management barely mentions Watson, a key element of the strategic imperatives, in the Q2 2018 press release and during the conference call.
However, the management keeps on insisting on future margin improvements for IBM to keep on raising earnings per share by leveraging a slow revenue growth.
If margin improvements materialize in the next few quarters, the current valuation of IBM provides a downside protection while keeping some potential for a more expansive valuation.
