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IBM Continues to Have a Growth Problem
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IBM Continues to Have a Growth Problem

International Business Machines (IBM) continues to have a growth problem, according to its Q3 financial report. I’m neutral on IBM shares. (See Analysts’ Top Stocks on TipRanks)

Revenue of $17.6 billion was up 0.3% (down 0.2% when adjusting for divested businesses and currency), missing analyst expectations of about $17.8 billion. However, earnings came in line with market expectations.

IBM’s revenue decline can be traced back to 2011 when it began to drop from $106.9 billion a year to mid-$70 billion in the last year. Meanwhile, the company has undergone “creative destruction,” which is still a work in progress.

Creative Destruction Yet to Pay Off

Coined by Austrian economist Joseph Schumpeter, creative destruction is the radical transformation of an economy or a corporation to keep up with long-term changes in market conditions. For corporations, creative destruction is the shedding of declining businesses for the purpose of plowing economic resources into new expanding businesses.

Since the beginning of the last decade, Big Blue has been doing just that. It has been getting rid of mature low-profit technology businesses and replacing them with emerging high-margin markets like the cloud and internet security.

The company acquired Red Hat, the open-source technology company, which brought Big Blue an innovative hybrid cloud platform and a vast open-source developer community.

While these strategic moves have helped IBM slow down the decline in revenues, it has yet to help the tech pioneer find its old glory days. Worse, its cloud business has shown signs of slowing down, according to the Q3 financial report.

Nonetheless, management was pleased with the company’s Q3 performance:

“With the separation of Kyndryl early next month, IBM takes the next step in our evolution as a platform-centric hybrid cloud and AI company,” said Arvind Krishna, IBM chairman, and chief executive officer. “We continue to make progress in our software and consulting businesses, which represent our higher growth opportunities. With our increased focus and agility to better serve clients, we are confident in achieving our medium-term objectives of mid-single-digit revenue growth and strong free cash flow generation.”

Wall Street’s Take

Wall Street has been warming up to IBM recently. Its shares have gained 20% over the last 12 months, but they lag behind peers, which have made gains in the range of 40%-60% over the said period.

TipRanks assigns a Smart Score of 5 to IBM, citing weak fundamentals, and decreased hedge fund activity. Meanwhile, Jim Chanos, the legendary short seller, is shorting IBM shares, accusing the company of “financial engineering.”

The analyst community doesn’t seem to share Chanos’ pessimism for the shares of Big Blue. Instead, it rates its shares a Moderate Buy, based on five Buy ratings, and three Hold ratings assigned in the past three months.

The average IBM price target is $162.13, implying 24.7% upside potential. The highest price target is $172, while the lowest is $150.

Bottom Line

IBM continues to have true believers in the analyst community, though it has yet to convince Wall Street that its creative destruction will re-ignite sales growth.

Disclosure: At the time of publication, Panos Mourdoukoutas didn’t own any shares of IBM.

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