International Business Machines Corp. (NYSE: IBM) has enjoyed a huge recovery in 2016. As of the close of April 12, IBM’s stock was actually the fifth best performing Dow Jones Industrial Average stock of 2016, with a total return of over 9.8%. IBM has been plagued as a business, representing a no-growth tech zombie without direction and with a management strategy of engineered earnings that had no real underlying strength.

But what if all the negative hype just went too far? 24/7 Wall St. recently saw other analyst calls signaling that perhaps its strong performance in 2016 might be indicating that the endless negativity may have been overdone. Credit Suisse has been the most bearish of all major brokerage firms in its analyst ratings.

Despite another negative analyst becoming less negative, Credit Suisse’s Kulbinder Garcha is telling investors that they better not fall into believing that IBM’s recovery is sustainable. Garcha has an Underperform rating and he maintained his very negative $110 price target on shares of Big Blue. Investors should be aware that Garcha’s target had been a tie for the street-low, versus all other analyst price targets.

Garcha sees IBM’s revenues not likely stabilizing until 2018. He also thinks that much of IBM’s business is being impacted by the cloud operations of competitors.

Perhaps most important here is that the investing community keeps talking about how cheap IBM is in its valuations. Garcha debunks the myth that IBM is a value stock.

Wednesday’s research call comes about five days ahead of IBM’s earnings report for the first quarter of 2016. Credit Suisse sees revenue at $18.2 billion and earnings per share (EPS) of $2.13, versus a consensus of $18.2 billion and $2.08 EPS. Garcha said:

We believe top line won’t stabilize until 2018, with the commentary on Japan tax benefit adding confusion on the earnings per share guidance. We see a painful multi-year turnaround from here, which drives underperformance.

On the core IBM suffering, Garcha said:

We believe that large parts of IBM’s business (hardware, operating systems, services) is being impacted by the Cloud, which represents more than 40% of the overall business. While the SI segments (35% of sales, or $29 billion in absolute dollar terms) may indeed grow at 13% per year, the decline in the core has been accelerating ($51 billion of sales, declining 11% last year on a constant currency basis). This would suggest that revenues may not stabilize until 2018 at the earliest, based on our analysis.

Credit Suisse is forecasting revenues to fall 3.6% to $78.8 billion in 2016 and to fall another 1.6% to $77.5 billion in 2017. Again, stability in revenues is not expected until 2018.

Garcha is warning for investors not to fall into the “stock is dirt cheap” trap. Garcha’s case for IBM not being distressingly cheap debunks that the headline price-to-earnings (P/E) ratio of 11 does look inexpensive on the surface. That being said, when compared with similar large cap turnaround names, IBM is currently trading at 14 times its free cash flow and 14.4 times its enterprise value versus free cash flow (EV/FCF) compared with a trough valuation of 7.6 times free cash flow and 7.0 times the EV/FCF basis on average.

Watson is supposed to be doing great for IBM, but Garcha remains concerned about how this is valued today versus reality. His report said:

IBM increasingly sees Cognitive Solutions as a driver of the business and aims to build a business around the Watson platform that can address a $3 trillion market, for which IBM could achieve an addressable market as high as $400 billion-plus. While we do believe the opportunity here is significant, it is also very early, with the commercial impact of such initiatives that may take several years if not decades.

One issue that 24/7 Wall St. always has focused on has been IBM’s massive backlog of services. This has been in decline, and Credit Suisse has pointed out that IBM’s backlog is running at historically low levels. Garcha said:

IBM’s backlog at the end of the fourth quarter of 2015 was $121 billion, down 5% year over year with TTM book-to-bill of 0.98-times. Additionally, we note that TTM aggregate signings till Q4-2015 is $48 billion, down 7% year over year with TTM short term signing growing to 15% from 10% of two years ago. Third, we see deferred income down 5% year over year in 2015.

Another issue is that the Japan tax benefit puts guidance in question. On this front, Garcha warned:

IBM disclosed the Japanese Supreme Court ruled in favour of the company that made available a tax benefit of $997 million. Now it is unclear how much of this was anticipated in the earnings per share guidance of “at least $13.50.” If the tax benefit was entirely baked in, FY16/FY17 operating EPS could be $12.44/$13.06. A second scenario is that the company reinvests the benefit to restructuring for cost reduction in the following years. However, we believe retention is unlikely as the company’s restructuring proves increasingly ineffective. The third scenario is that the benefit is not baked in. Regardless, we note that “operating EPS” stays the same at the best. We see downside in all 3 scenarios. Additionally, we see a challenging ramp ahead in FY16, given current guidance implies PTI to grow 120% from the first quarter to the fourth quarter Q4 versus a historical average of 90%.

Other key warnings from Garcha were listed as follows:

• Internal turmoil is becoming more clear — Given the competition for technology talent, we do believe such statistics provide an overhang for the fundamental outlook for IBM.
• Even excluding currency impact, we believe IBM is in decline and sees revenues shrinking at CAGR of 4% in the long term.
• Services multiple pressures build — Up until now our concerns had been focused on the hardware and software segments. We now shift focus to Services. We believe PTI here could shrink by ~$0.6 billion between 2015 and 2017.
• Cloud could be a secular problem, and margin dilutive long term — IBM is not new to this business and has its own cloud offering in the form of SoftLayer and Bluemix, but the important aspect to highlight is that IBM is not necessarily the incumbent it has been historically.
• Restructuring proving less effective — The bottom line here is that such restructuring is proving to be increasingly ineffective in further rationalizing IBM’s cost base.
• High levels of mainframe exposure and declining organically — Fundamentally, we demonstrate that from cycle to cycle this segment is shrinking given x86 performance improvements and saturation of the market.

One last issue on Watson was shown in the Credit Suisse report:

We note that IBM has been trying to prop up its strategic initiatives, notably Watson. Here the company’s M&A has focused on the healthcare business. The company believes that a healthcare disruption is underway. The company estimates that five leading chronic diseases pose a $47 trillion economic impact, and in the future more than 75% patients are expected to use digital health services. Out of $8 trillion spending on global healthcare, $2 trillion is wasted. The company believes these opportunities give the company a $200 billion addressable market for Watson Health.

Some investors might worry that the most negative analyst staying extremely negative would hurt the stock. So far, that has not been the case as IBM’s stock price was last seen up 0.8% at $150.80 on Wednesday morning. Its consensus analyst price target is $136.32, and the 52-week trading range is $116.90 to $176.30.

If the near 10% gain from the end of 2015 ($136.23 on a dividend-adjusted basis) in IBM shares sounds impressive, think about it against the 52-week low. That low of $116.90 was hit on February 11, 2016, when the broad stock market was in free fall, and IBM shares were last seen up a whopping 29% from that date.

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