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International Business Machines Corp IBM

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Economic Moat




Red Hat Continues to be a Single Bright Spot for IBM Amid COVID-19; Shares Fairly Valued

Julie Bhusal Sharma Equity Analyst

Analyst Note

| Julie Bhusal Sharma |

IBM reported a third consecutive quarter of revenue declines in its third quarter results, although top-line results were above our former expectations--as Red Hat continued to be a lone growth driver--and IBM’s non-GAAP earnings were in line with CapIQ consensus. Earnings came over a week after IBM announced its plans to spin off its managed infrastructure services businesses. Nonetheless, little new information was given on the spin-off expected for 2021. Still, we continue to think the spin-off is beneficial more in optics--as it should allow IBM’s overall top-line growth to look better by divesting the large but dwindling segment. IBM continued to refrain from publishing an outlook for the quarter or full year, but we expect the final quarter will see strong sequential growth due to IBM’s seasonality despite another expected quarter of annual declines. We’ve also increased our expectations for the year, leading us to raise our fair value estimate for the narrow-moat name to $125 per share from $120. Shares are down 3% to $122 per share upon the news, implying that IBM’s stock is fairly valued, in our view.

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Company Profile

Business Description

IBM looks to be a part of every aspect of an enterprise’s IT needs. The company primarily sells infrastructure services (37% of revenue), software (29% of revenue), IT services (23% of revenue) and hardware (8% of revenues). IBM operates in 175 countries and employs approximately 350,000 people. The company has a robust roster of 80,000 business partners to service 5,200 clients--which includes 95% of all Fortune 500. While IBM is a B2B company, IBM’s outward impact is substantial. For example, IBM manages 90% of all credit card transactions globally and is responsible for 50% of all wireless connections in the world.

One New Orchard Road
Armonk, NY, 10504
T +1 914 499-1900
Sector Technology
Industry Information Technology Services
Most Recent Earnings Jun 30, 2020
Fiscal Year End Dec 31, 2020
Stock Type High Yield
Employees 381,100