Analyst Note| Julie Bhusal Sharma |
IBM beat expectations in its second quarter for both revenue and non-GAAP earnings per share, when compared with CapIQ consensus estimates. The beat showcased better software and cloud sales than we expected--which we believe demonstrates clients’ priorities in digital transformation, even if the more discretionary line of work could be postponed until a post-pandemic environment. Still, the results were better on a relative basis, and we continue to believe IBM’s cloud business has little probability of eclipsing AWS’, Azure’s, or Google Cloud’s market share. IBM refrained from publishing an outlook for the quarter or full year, but all in all, we think that the results are largely a reflection of a mismatch in the firm’s vulnerability to the pandemic rather than unseen promise in IBM’s business. Considering our expectations for a more resilient 2020, we are increasing our fair value estimate for the narrow-moat name to $120 per share from $118 per share. Shares are up 5% upon the news, implying that investors should wait for a greater margin of safety before investing in IBM.