IBM dazzled investors with its first annual growth in 7 years, but some doubters aren't buying the comeback story (IBM)

Ginny Rometty

IBM's Q4 revenue fell 3.5% from last year, and analysts predict that IBM's growth will remain flat.
Investors are focusing on how IBM's software business does, which showed some promise this quarter in Cognitive Solutions.
Although expectations for IBM are flat, one analyst believes the negativity about IBM's stock is "overdone."
As IBM prepares to close its acquisition of Red Hat, analysts are also taking note of whether acquiring another company will actually help IBM's cloud business.

IBM's stock got a nice lift on Wednesday, rising nearly 9%, a day after the company announced its first annual revenue growth since 2011.

But analysts are divided over whether the software and services giant's 2018 report card is a sign of even better things to come, or a mere blip masking IBM's ongoing challenges.

While IBM's full year revenue growth increased 1% in 2018, revenue in the fourth quarter declined 3.5% year-over-year.

"It's looking like another mediocre IBM earnings release," Andrew Bartels, VP and principal analyst at Forrester Research, told Business Insider. "The report of strong cloud growth should be taken with a grain of salt. It's another quarter of IBM basically moving sideways."

Under the leadership of CEO Ginny Rometty, IBM has moved to transform its business, shedding older products and units and focusing on higher-growth areas such as cloud computing, AI and blockchain.

Although IBM's strength in the fourth quarter lay in consulting, its growth in Cognitive Solutions — the segment that includes its AI platforms, including IBM Watson, as well as certain database products — is what investors care most about.

This past quarter, the revenue of Cognitive Solutions was flat as compared to last year, but it did grow 2% at constant currency. This was the key growth analysts were looking for, and IBM was able to hit that target.

"We do think the software turn is going to be something that's repeatable," John Roy, lead analyst at UBS, told Business Insider. "They are going to see growth in software. That's pretty much a key element of the story for us. We'll see how sustainable that is."

The big Red Hat hope

While businesses like cloud computing and AI offer a lot of growth potential, they also put IBM in competition with fierce competitors.

IBM "barely poses a major challenge to today’s tech giants, tough competitors in the new economy who have grabbed and continue to seize the major share of new growth areas that are so crucial for IBM's success," Investing.com senior analyst Haris Anwar said in a statement.

A big theme this year will be IBM's upcoming acquisition of Red Hat, which is expected to close in the second half of 2019. Analysts say a big question will be whether IBM can successfully sell Red Hat's services and if Red Hat can help IBM create a working hybrid cloud — one that processes information across both public cloud offerings and private, on-premise servers.

Right now, IBM lags behind Amazon, Microsoft and Google in its cloud offering, but Red Hat could help IBM in tapping into customers who want to move to the cloud but are not ready to go all in — hence, helping it forge a stronger hybrid cloud.

"My aim isn't to downplay Red Hat’s strong position in the cloud computing arena, but rather my problem remains squarely with the IBM's leadership which failed to foresee the changing tech landscape quickly enough," Anwar said.

Anwar warns that investors should avoid IBM and look elsewhere, but Roy disagrees. Roy said he's seen plenty of negativity in IBM stock, but he believes it's overdone. Instead, analysts' expectations are more flat, and there's room for marginal growth.

"All in all, we think that '19 could be good, and obviously the Red Hat acquisition is something that's sitting out there in the second half," Roy said. "Between now and when that closes, it looks like the rest of the businesses are doing OK and improving."

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