Proactive Investors - International Business Machines Corp. (NYSE:IBM) is no breakout play but its software momentum is encouraging, analysts at Jefferies believe.
The analysts have initiated coverage on the tech firm with a ‘Hold’ rating and US$180 price target.
IBM shares traded hands at about US$59 on Friday afternoon.
IMB’s renewed focus on software and strategic consulting under CEO Arvind Krishna positions it uniquely, the analysts highlighted in a note to clients.
“The company's focus on inorganic software and consulting growth (while shedding noncritical operations) began years ago but culminated in the $34 billion purchase of Red Hat (NYSE:RHT) in 2019, significantly strengthening IBM’s position in the hybrid multi-cloud ecosystem,” they wrote.
“The late 2021 spinoff of its managed infrastructure services arm (Kyndryl) has then allowed IBM to focus on growing its open hybrid cloud platform and AI capabilities.”
With these business transformations completed, the Jefferies analysts believe the company should be judged on its growth and margin delivery relative to its peers for its software and strategic consulting businesses.
“We like the strategic direction that management is headed towards and believe that there is nothing structurally preventing the company from achieving growth and margin upside in the long run, though we note that IBM's software business is operating at both lower growth rates and lower margins relative to its software peers,” they wrote.
They believe IBM’s stock can go higher but upside is capped in the absence of a meaningful acceleration in software.
“We prefer to remain on the sidelines given we have limited visibility on the near-term accelerants and haven't seen signs of an inflection yet,” they concluded.