Why IBM’s Turnaround Can Shine, If Forex Headwinds Abate

By Chris Lange Updated Jan 30, 10:19PM EST · Published Apr 9, 11:55AM EDT

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Why IBM’s Turnaround Can Shine, If Forex Headwinds Abate — © Paul Morigi / Getty Images

International Business Machines Corp. (NYSE: IBM | IBM Price Prediction) ranks as one of the three best-performing Dow Jones industrial average stocks so far in 2019, and it seems the bulls are calling for this stock to rise even higher. With its acquisition of Red Hat closing later this year, Big Blue is picking up steam at least according to one analyst.

Nomura reiterated a Buy rating for IBM with a $160 price target, implying an upside of 11.6% from the most recent closing price of $143.39.

The brokerage firm believes that organic improvement in cloud and artificial intelligence (AI) plus inorganic transformation puts IBM in an incredible position for a return to sustained sales growth. Ultimately this is mixed, where on one hand Nomura is modeling 2% in organic growth in the fourth quarter, while on the other foreign exchange (FX) has worsened.

Nomura estimates cloud as a service sales will grow about 20%. IBM is winning new, even cloud native, customers before the Red Hat acquisition. A modest though respectable 15% of respondents in Nomura’s CIO survey use the IBM Cloud. OpenShift should help IBM win new customers and new workloads as enterprises begin to usher mission critical applications from on-premise to public or private clouds.

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Also Nomura expects “Watson on AWS/Azure/GCP” courtesy of OpenShift to broaden its total addressable market. This plus new leadership should help Watson news flow to recover from an (overstated) low last summer. More than 30% of respondents in the CIO survey already use Watson.

In the report, the firm detailed:

We believe FX headwinds should be at least at the high-end of IBM’s 1-2 point guidance. We lower our 2019 estimates from $78.0 billion / $13.95 to $77.2 billion / $13.90. Consensus of $78.0 billion / $13.91 does not appear to encompass FX headwinds. Our $160 target price is 11.3x our 2020E EPS of $14.17. We believe IBM’s return to growth merits a premium to its five-year average of 10x, though the pricey Red Hat deal should cap multiple expansion.

Excluding Tuesday’s move, IBM had outperformed the broad markets, with its stock up about 26% year to date. However, over the past 52 weeks, the stock was actually down closer to 5%.

Shares of IBM were last seen down 1% at $142.29, in a 52-week range of $105.94 to $162.00. The consensus price target is $141.06.

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About the Author Chris Lange →

Chris Lange is a writer for 24/7 Wall St., based in Houston. He has covered financial markets over the past decade with an emphasis on healthcare, tech, and IPOs. During this time, he has published thousands of articles with insightful analysis across these complex fields. Currently, Lange's focus is on military and geopolitical topics.

Lange's work has been quoted or mentioned in Forbes, The New York Times, Business Insider, USA Today, MSN, Yahoo, The Verge, Vice, The Intelligencer, Quartz, Nasdaq, The Motley Fool, Fox Business, International Business Times, The Street, Seeking Alpha, Barron’s, Benzinga, and many other major publications.

A graduate of Southwestern University in Georgetown, Texas, Lange majored in business with a particular focus on investments. He has previous experience in the banking industry and startups.