Analyst Note| Julie Bhusal Sharma |
IBM reported fourth-quarter results that beat FactSet revenue and earnings consensus expectations and visibility into the year ahead. However, weaker free cash flow dampened the beat, contributing to shares declining by roughly 2% after-hours to nearly $138 per share. While earnings also came with news of job cuts at IBM, we see these cuts being unlike other technology sector layoffs at the moment, as they are related to IBM’s recent divestitures. Altogether, we are maintaining our fair value estimate for the narrow-moat stock at $126 per share, which leaves shares fairly valued, in our view. While we think IBM benefits from a narrow moat, we think its moat is trending negative as the IT stack of enterprises has become increasingly interoperable, chipping away at IBM’s less-differentiated businesses. We believe IBM will benefit from overall robust demand for enterprise software and IT consulting—but not come close to growth rates we expect for the respective markets individually.