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International Business Machines Corp IBM

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Morningstar’s Analysis

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IBM Beats in Q2 Earnings as Digital Transformation Work Less Vulnerable Than Feared; Raising FVE

Julie Bhusal Sharma Equity Analyst

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.

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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