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IBM Results Fail to Impress

Andrew Lange

Andrew Lange: IBM posted an underwhelming third-quarter result as the company continued to juggle strategic and nonstrategic business lines. The company's legacy revenue and the decline there was apparent. We're particularly surprised by the decline in the cognitive solutions business. The company highlighted things like collaboration as the mainframe middleware as areas of weakness. 

On the positive side though, the global business services and global technology services businesses showed improvement. We're hopeful that digital transformation will drive revenue for the consulting and infrastructure services business lines. 

In terms of strategic imperatives, the business grew 11% on a year over year basis. On a trailing 12-month basis, it constituted $39.5 billion. Strategic comparatives are expected to be a decent midterm growth driver for the business. However, we expect a slow down over time as the compare gets harder and harder. Still strategic comparatives remains one of the only viable options for IBM's top-line growth rate, that's if it is to achieve even modest revenue growth. 

Our fair value estimate is $168 on this narrow-moat name. We believe investor sentiment is low and we think the company is trading at a discount to our fair value estimate. Therefore, we think the company would appeal to risk-seeking technology investors.