IBM Beats in Q4 With a Fresh Start, Kyndryl Apart

IBM reported fourth-quarter results that came in strong as major enterprise digital transformation projects are underway--serving as tailwinds to IBM's software and consulting business. In addition, the company benefited from a one-time boost to revenue after establishing a commercial relationship with the now spun-off segment Kyndryl. All in all, results were above our expectations as well as FactSet consensus. We continue to believe IBM is undergoing a negative moat trend due to vulnerability as customers migrate workloads to the cloud, which we think is the reason why IBM's software and consulting group are continuing to lag its peers. However, IBM's fresh start after divesting its worst-performing segment, Kyndryl, has us likely to raise expectations slightly over the next five years, as we do expect IBM to benefit from a renewed focus on software and consulting. Combined with rolling our model ahead, we will likely raise our fair value estimate for the narrow-moat name from $119 per share.