Option Trade 
International Business Machines Corp. (NYSE:IBM) Puts
Tuesday, July 18, 2017

** OPTION TRADE: Buy the IBM AUG 18 2017 150.000 PUT at approximately $2.90. Place a pre-determined sell at $5.80.

Note: No protective stop losses added -- but if you wish to do so make it $1.15.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey   

Since reaching a peak in March, the struggling info tech giant International Business Machines Corp. (NYSE:IBM) has fallen off dramatically. Shares briefly topped $180, but slid all the way down to the low $150s, which is where they currently stay. Going further out IBM stock was sitting north of $200 per share back in 2013.

And the moment of truth is now here when International Business Machines Corp. announces its second-quarter results after the market closes today, July 18. For Q2, it is expected that the revenue will continue to decline as it did in Q1 due to a shift to cloud services as well as currency headwinds. Analysts forecast earnings of $2.73 per share, up from $2.61 during the same period last year.

IBM has been struggling to turn its business around, but after 20 straight quarters of declining revenues, Wall Street has a bearish outlook on the stock. Last quarter the company was able to top estimates for earnings, but another dip in revenue raised more concerns over the company, which was unable to close a few main deals that would have provided a much needed revenue boost.

Analysts expect another revenue decline, with the consensus calling for a year over year sales decline of 3.8%, worse than the 2.8% decline it posted last quarter. IBM's cloud business will be a major focal point for the quarter.

Analysts see a lot of potential for the company to grow cloud revenues with large enterprises, but so far the growth that investors are waiting for has yet to happen, and it is unlikely that growth will happen any time soon.

There is a lot of pessimism in the stock at this time, and until IBM is able to break its five-year streak of declining revenues investors should make sure any investment in the stock is hedged with plenty of downside protection.

IBM has bucked the trend of a broad technology surge this year, having shed 7.8% so far and lagging the categorized Computer - Integrated System industry.

International Business Machines Corporation has a 50-day moving average of $153.28 and a 200 day moving average of $167.12. The stock has a market cap of $145.65 billion, a PE ratio of 12.7490 and a beta of 0.97. International Business Machines Corporation has a one year low of $142.50 and a one year high of $182.79.

Influencing Factors to Consider

Revenue for IBM has been sliding since 2012, and that trend is expected to continue for the current quarter and year. For the most recent three-month period, to be reported on July 18, a sales decline of nearly 4% is supposed to lead to earnings decline of 7%. For the full year, meanwhile, a sales decline around 2% will keep earnings flat.

IBM has been working to divest and reorganize its legacy business, transitioning — like most tech companies — to the cloud. But more talk about strategic initiatives isn’t likely going to add much fuel to the fire next week. The turnaround for IBM is merely going to take time.

Despite the growth in Strategic Imperatives, IBM's Technology Services & Cloud and Global Business Services (GBS) segments have reported weaker results over recent quarters as the transition to cloud services is impacting the implementation of traditional packaged applications.

Additionally, the server hardware business has also not fared well, as both of its server lines are in a later stage of the product life.

Furthermore, the storage business will likely post another quarter of disappointing results as the secular changes in the industry impact revenues.

Apart from cloud computing, IBM has been gearing up to be a major force in the AI market with Watson. Despite expanding product offerings, partnerships, deal wins and significant investments, Watson has failed to be a game-changer - what many investors hoped it to be - at least in the near term.

Moreover, the Blockchain initiatives are still at nascent stages to contribute meaningfully to top-line growth. Further, sluggish IT spending and stiff competition in most of the markets is significant headwind.

Also, the largest shareholder of the company, Warren Buffett's Berkshire Hathaway, sold a third of its share in the company in May, which had a negative impact on share price movement. Further, increasing competition from peers like Microsoft MSFT, Amazon and Alphabet is also a headwind.

Analysts and Hedge Funds Opinions

Analysts don’t really like IBM stock ahead of the earnings report. The average rating on the stock is a “hold.” The average price target from the always overly bullish analysts implies just 6.5% upside over the next 12 months. Earnings-per-share estimates for this quarter have come down from $3.17 to $2.75 in just 90 days.

Notably, Barclay’s analyst Mark Moskowitz recently came out with a bearish note ahead of the IBM earnings report. He reiterated an underweight rating on IBM stock and slashed the price target from $141 to $132 (implying almost 15% downside). Here is what Barclays had to say about IBM stock in that note:

    “The narrative is becoming tedious — a lot of investments in next-gen tech but with little revenue impact and with increasing dependence on cost take-outs or below-the-line items to manage EPS.”

On Jul 12, IBM Corporation IBM was downgraded to a Zacks Rank #5 (Strong Sell).

The downgrade can be attributed to an inconsistent revenue growth trajectory, slow transition to cloud, increasing competition and sluggish IT spending.

“We believe that IBM's significant investments into "Strategic Imperatives" - cloud computing, mobile, cognitive technologies and artificial intelligence (AI) - will take some more time to post credible top-line growth. Until then, we expect share price movement to remain muted.

Notably, IBM shares have massively underperformed the S&P 500 on a year-to-date basis. While the index has gained 8.5%, the stock has registered a negative return of 7.4%.”

Equities research analysts at Cantor Fitzgerald issued their FY2018 EPS estimates for shares of International Business Machines Corporation in a research note issued on Friday. Cantor Fitzgerald analyst J. Foresi forecasts that the technology company will post earnings per share of $14.01 for the year. Cantor Fitzgerald currently has a “Hold” rating and a $166.00 price target on the stock.

Several other analysts have also recently commented on the company…..

  • Vetr downgraded shares of International Business Machines Corporation from a “hold” rating to a “sell” rating and set a $150.26 price target on the stock in a report on Monday.
  • Cleveland Research initiated coverage on shares of International Business Machines Corporation in a research report on Thursday, June 22nd. They issued a “neutral” rating for the company.
  • BidaskClub raised shares of International Business Machines Corporation from a “strong sell” rating to a “sell” rating in a research report on Tuesday, June 13th.

Harvey’s Options Volatility Indicator


IBM is under pressure due to its time-consuming business model transition, which is negatively impacting results. Despite significant investments, the company is yet to gain a dominant position in the Infrastructure as a Service (IaaS), Platform as a Service (PaaS) and Hosted private cloud market.

Per data from Synergy Research, IBM lagged well behind Amazon Web Services (AWS) and Microsoft MSFT in these markets at the end of first-quarter 2017.

There is nothing about the trends in estimates or the fundamentals yet, that would interpret an upward swing.

As a result of the aforementioned factors, IBM is expected that the company's revenues for Q2 will decline.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

 ** OPTION TRADE: Buy the IBM AUG 18 2017 150.000 PUT at approximately $2.90. Place a pre-determined sell at $5.80.

Note: No protective stop losses added -- but if you wish to do so make it $1.15.

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