IBM Reports an Expectedly Solid 3rd Quarter

While we expect IBM to return to modest revenue growth over the midterm, we have pared back our overall growth and margin assumptions, as we think the turnaround in Global Business Services, or GBS, and Technology Services and Cloud Platforms, or TS&CP, will be more prolonged than originally thought.

Nevertheless, we do expect an eventual improvement in these businesses and still rate IBM as having a strong embedded position in the IT services (business and technology services) and cloud markets.

In addition, early signs point to an improved outlook for the Systems business based on good demand for IBM’s new z14 mainframe and storage products. The z14 is particularly interesting given its pervasive encryption capabilities and suitability for in-demand usage around machine learning and Blockchain.

Overall, our long-term view on IBM remains unchanged and we reiterate our fair value estimate and narrow economic moat rating. With shares approaching our fair value in afterhours trade, we’d seek a wider margin of safety before investing in the name.

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