IBM Looks Toward Cloud Solutions for Growth
We view shares as slightly undervalued but would wait for a better risk for reward entry point.
Narrow-moat IBM's (IBM) third-quarter revenue of $18 billion missed consensus estimates as sales declined 3.9% year over year. The cloud and cognitive software segment, which now includes Red Hat, increased sales by 6.4% year over year, with bright spots in security, Internet of Things, and hybrid cloud offerings. Compared with the prior year, global business services expanded by 1% due to consulting strength; however, global technology services, systems, and global financing declined by 5.6%, 14.7%, and 11.7%, respectively. Although IBM is still transitioning its overall business, we believe Red Hat gives the company a favorable boost to its longer-term offerings for hybrid-cloud ecosystems, and we are maintaining our $158 fair value estimate. We view shares as slightly undervalued after falling about 5% afterhours, but acknowledge the uphill battle the company is facing in transforming its business and would wait for a better risk for reward entry point.
IBM reiterated full-year expectations, initially stated in August, of GAAP EPS being at least $10.58, non-GAAP EPS minimum of $12.80, and free cash flow of about $12 billion. We believe IBM is wisely focusing on evolving its business to capitalize on enterprises shifting workloads to cloud-based resources. With Red Hat's Linux expertise and its OpenShift container application platform, IBM has more opportunities to stay ahead of how developers and infrastructure teams are consuming resources in hybrid-cloud networks. In our view, IBM has acknowledged the shift in customer buying behavior from large upfront hardware purchases and toward more consumption-based solutions and services that can offer tools like analytics, monitoring, and computing on-demand. While IBM still has a long way to go to challenge the large hyperscale cloud providers, we believe the company is headed in the right direction to remain a force in the IT environment.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Mark Cash does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.