IBM: When Good News Drives Share Prices Lower

IBM (NYSE: IBM) posted extraordinarily strong earnings for the quarter that ended June 30. The news caused the technology giant’s shares to slip after hours and then rise very slightly. The market’s view on the future of the economy was probably the cause. IBM’s net income rose 8% to $3.7 billion as the company reported $26.7 billion in revenue, about $1.35 billion more than consensus estimates. IBM lifted its full-year earnings forecast to a floor of $13.25 a share, also better than what Wall St. expected.

Software and hardware sales moved sharply higher to a large extent because of demand for servers. The movement to cloud computing is likely to help sales at all firms that manufacture the machines. Companies such as Google Inc (NASDAQ: GOOG) and (NASDAQ: AMZN) run most of their services on these remote servers, and Apple Inc. (NASDAQ: AAPL) has rapidly entered the business as well.

The market’s reaction to IBM’s news is based on several issues. The first and most obvious is the concern that as the global economy slows, large technology companies will see demand slacken even if they are in businesses that help large online companies move their own sales higher. The evidence grows nearly every day that GDP improvement in the U.S., UK and EU has ended. The Chinese economic expansion has slowed slightly as well.

The less obvious concern about IBM’s results is that they are based on commercial demand and not consumer demand. IBM sold its PC business to Lenovo nearly a decade ago, and it has no exposure to the PC market. But it probably faces indirect trouble as unemployment in many regions remains high. Eventually, all large tech firms rely on the health of the consumer economy. Cloud computing may be a rapidly growing business, but much of its success is based on the health of consumer demand. Consumer spending is still the largest portion of GDP. IBM’s results may prove that, despite the jobless recovery, corporate demand for IT has grown. That can only continue for a brief period if record numbers of people are out of work.

The stock market’s view of large tech is not as positive as it was two quarters ago. Google recently reported strong earnings. Its share rose and quickly plateaued. The same thing happened to Dell (NASDAQ: DELL) and Oracle’s (NASDAQ: ORCL) shares sold off even though its earnings were relatively good.

IBM may have posted good numbers, but it cannot outrun a poor economy.

Douglas A. McIntyre