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Why We Downgraded IBM

We lowered the company's moat rating to narrow from wide because we have concerns about its long-term competitive position and the future economics of pricing and margins.


Andrew Lange: We have decided to lower IBM's economic moat to narrow from wide. IBM's moat continues to be based upon its intangible assets and customer switching costs, but we have concerns over the duration of these moat sources.

We expect the company's core business to most likely buoy its industry position and returns on invested capital for the next 10 years, with the firm managing the margin and cash flow of these flatlining businesses.

However, with “strategic imperatives” becoming the cornerstone of the company's new long-term complexion, we have concerns about IBM's long-term competitive position in these increasingly competitive fields and the future economics of pricing and margins. In our opinion, there is too much uncertainty surrounding these newer endeavors to assume that excess normalized returns on capital will be more likely than not 20 years from now.

Almost every other software and/or services provider has the same investment agenda and we cannot guarantee that competition will be rational, or that IBM will be able to differentiate itself from the array of emerging social, mobile, analytics, cloud, and security products and services likely to flood the market over the coming 10 to 20 years.

Andrew Lange does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.