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International Business Machines Corp IBM

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IBM’s Q3 Disappoints With Weak Software and Kyndryl Sales; Shares Nearing Our $125 Fair Value

Julie Bhusal Sharma Equity Analyst

Analyst Note

| Julie Bhusal Sharma |

Despite significant market demand for digital transformation tech and services, IBM’s third-quarter results didn’t live up to our expectations, even when omitting its poor-performing Kyndryl business to be spun off soon. As IBM nears the spin-off of its managed infrastructure business, to be known as Kyndryl, we think that the real drivers for the remaining company lie in IBM’s consulting and software businesses. While consulting revenue surpassed our expectations (and consensus’), IBM’s software revenue missed—leaving us wary of the remaining company’s performance after the spin-off. Overall, we thought results were reflective of our ongoing thesis that while IBM has a narrow moat rating based on switching costs, IBM is undergoing a negative moat trend. Enterprise workload migration to the cloud already involves major business disruptions, making enterprises have to undergo switching costs regardless of if they stay with an IT services or software vendor or not.

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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, 2021
Fiscal Year End Dec 31, 2021
Stock Type High Yield
Employees 375,300