One of the rules of investing in publicly traded companies is that you cannot profit by looking into the past of these companies, but into their future. For a simple reason: market prices already reflect the past, but not the future.
The problem is that emotional investors often forget this rule, chasing after the stock of companies that have been stellar performers in the past, hoping that the fortunes of these companies will continue in the future. At the same time, these investors steer away from companies that have performed poorly in the past, thinking that their misfortunes will continue in the future.
That’s how emotional investors end up looking at the wrong numbers, and buy stocks near the top rather than near the bottom.
IBM’s (NYSE:IBM) stock is a case in point. Investors seem to be fixated on the company’s past, because they don’t understand the nature of IBM’s innovation drive. The company has been riding one technology shift after another in computing, a sector it has pioneered through heavy investments in R&D. And now it is beginning to ride the next technology shift driven by cognitive systems—machines that sift through massive data to identify patterns that can help humans make better and faster decisions in science, business, and government.
On Monday, Big Blue reported Q3 revenues and earnings that beat analyst estimates. Nonetheless, Wall Street sent the company’s shares lower following the report.
IBM versus S&P500
| Company/ETF | 1-Day Performance | 1-year Performance | 5-year Performance |
| IBM | -2.50% | 7.17% | -19.59% |
| SPDR S&P 500 | -0.56 | 5.22 | 66.18 |
Source: Finance.yahoo.com 10/18/16
Apparently, investors are focusing on the overall revenues, which were flat compared to 3Q 2015, missing out on the revenues from “strategic imperatives”(cloud, Watson and analytics, security, social and mobile technologies), which were up 16 percent to $8 billion in 3Q and amounting to $31.8 billion over the last 12 months. This is a higher growth rate than the 2Q.
Those strategic imperatives now represent 40 percent of IBM's business, a goal achieved well ahead of the company’s own expectations.
- IBM's cloud business grew 44 percent, and IBM's cloud revenues over the trailing 12 months were $12.7 billion. IBM's cloud "as-a-service" revenue annual run rate was $7.5 billion through the end of 3Q - a 66 percent increase, after being up 50 percent in 2Q. In 3Q, IBM closed cloud deals with companies such as Pratt & Whitney, Sky Broadcasting, Dixon's, Vodafone India, and JFE Steel.
- IBM analytics business grew 14% in the quarter (where Watson lives), and the security business grew 11%.
In the meantime, IBM is investing aggressively to drive this growth. Through the first three quarters of 2016, the company invested more than $12 Billion in CapEx, R&D and acquisitions. This compares with $12 billion invested throughout the full year of 2015.
IBM has closed 26 acquisitions since the start of 2015. In 3Q, the company announced the acquisition of Promontory Financial Group, the cornerstone of a new IBM Financial Services business that will put Watson at the heart of regulatory compliance and risk management.
The bottom line: IBM continues to invest heavily into the fast growing segments of its business, and these are the right numbers to look at, given the nature of IBM’s innovation drive.
