Why Analysts Are Cautiously Optimistic on IBM After Q3

By Chris Lange Updated Jan 30, 2:27PM EST · Published Oct 17, 1:50PM EDT

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Why Analysts Are Cautiously Optimistic on IBM After Q3 — © Ethan Miller / Getty Images

For the most part, analysts seemed to be sidelined on International Business Machines Corp. (NYSE: IBM | IBM Price Prediction) after it released its third-quarter financial results after the markets closed on Wednesday. But they see a light at the end of the tunnel.

24/7 Wall St. has included some highlights from the earnings report, as well as what analysts are saying after the fact.

IBM did manage to exceed analyst expectations with a third-quarter profit of $2.68 per share, outside of items. The results beat the Refinitiv consensus estimate of $2.67 per share. Its net income fell to $1.87 per share ($1.67 billion) from $2.94 per share ($2.69 billion) a year ago.

IBM’s total revenue fell by almost 4% to $18.03 billion in the third quarter, short of the consensus estimate of $18.22 billion. The company did indicate that revenues would have dropped by only 0.6%, excluding the impact from currencies and business divestitures. Unfortunately, IBM’s new businesses and strategic imperatives just are not able to offset the old core businesses fast enough to move the needle for IBM to be considered attractive to investors who want growth.

In a post-acquisition world with Red Hat under the IBM umbrella, the company hopes to (and needs to) grow its subscription and recurring revenues. IBM’s technology services unit showed a 5.6% drop to $6.70 billion in the quarter. Here is how its growth segments performed after adjusting for currencies: Revenue for Red Hat was up 20%, Cloud & Cognitive Software was up 8% and Cloud revenue was up 14%.

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Credit Suisse reiterated an Outperform rating with a $173 price target. The firm said that IBM is continuing to center on the return to sustained revenue growth. Credit Suisse thinks that inflection starts in the fourth quarter, with an early boost from mainframe before passing the baton to Red Hat and the related pull-through of “core” IBM in 2020. Indeed, early progress on Red Hat is encouraging and Credit Suisse continues to believe the acquisition significantly improves IBM’s standing in the rapid push toward hybrid cloud.

Merrill Lynch reiterated a Buy rating with a $170 price target. The firm offered this investment rationale:

We view IBM as a defensive investment given its high exposure to recurring sales, cost cutting levers, solid balance sheet, potential share gains, and relatively stable margins. We believe IBM will embark on further cost cutting, and enhance its services and software offerings through acquisitions. Longer term, we expect IBM to take share in IT spending with its Cloud and AI initiatives.

Here’s what a few other analysts had to say:

Wells Fargo reiterated a Market Perform rating and lowered its price target to $140 from $147.
BMO reiterated a Market Perform rating and lowered its price target from $157 to $152.
Wedbush reiterated a Neutral rating and cut its target price to $155 from $165.
CFRA reiterated a Buy rating with a $165 price target.
Nomura Instinet reiterated a Buy rating and cut its target to $170 from $175.

Shares of IBM traded down 6% on Thursday to $133.66, in a 52-week range of $105.94 to $152.95. The consensus price target is $153.05.

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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.