IBM’s Q2 a Tale of Two Drivers, but Kyndryl Spin-off Will Moderate Headwinds Soon; Shares Overvalued

In IBM’s second quarter, the company dealt with continued headwinds to its managed infrastructure business because of the option to now have public cloud providers manage workloads, while also benefiting from cloud tailwinds in its software and business services portfolio. But IBM won’t experience as significant offsetting trends thanks to the cloud in its results for much longer. IBM plans to spin off its managed infrastructure business, which will be called Kyndryl, by the end of this fiscal year. IBM retained its adjusted free cash flow expectations at a midpoint of $11.5 billion for 2021, while refraining from providing a top- and bottom-line outlook. As a result, we’re maintaining our fair value estimate of $125 per share for narrow-moat IBM, which leaves the company overvalued, in our view.