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.