IBM’s Q3 Disappoints With Weak Software and Kyndryl Sales; Shares Nearing Our $125 Fair Value

Despite significant market demand for digital transformation tech and services, IBM’s third-quarter results didn’t live up to our expectations, even when omitting its poor-performing Kyndryl business to be spun off soon. As IBM nears the spin-off of its managed infrastructure business, to be known as Kyndryl, we think that the real drivers for the remaining company lie in IBM’s consulting and software businesses. While consulting revenue surpassed our expectations (and consensus’), IBM’s software revenue missed—leaving us wary of the remaining company’s performance after the spin-off. Overall, we thought results were reflective of our ongoing thesis that while IBM has a narrow moat rating based on switching costs, IBM is undergoing a negative moat trend. Enterprise workload migration to the cloud already involves major business disruptions, making enterprises have to undergo switching costs regardless of if they stay with an IT services or software vendor or not.