An earlier version of this story misstated the name of Instinet's analyst who covers IBM. He is Jeffrey Kvaal.
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Even the bulls had trouble pointing to many positives in IBM's legacy businesses as the tech giant reported revenue that fell short of expectations late Wednesday.
"Negatives rule the day," concluded Instinet analyst Jeffrey Kvaal, who rates IBM's stock a buy. Though IBM's newly acquired Red Hat business showed accelerating growth, the company's Global Technology Services outsourcing business sported a "materially worse" performance in the third quarter, a weakness that's expected to continue heading into next year.
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Still, Kvaal contended that IBM was "growing in the right places" given the Red Hat acceleration as well as encouraging indications for the mainframe business. "While we would prefer broader outperformance, if given the choice, we will take the one with the higher multiple (Red Hat)," he wrote, while lowering his price target to $170 from $175.
IBM shares were off 6% in Thursday trading.
Stifel analyst David Grossman said that IBM's disappointing performance in legacy software reflected a combination of cannibalization from Red Hat, secular challenges, and execution issues in the GTS segment.
"The stabilization of GTS and now legacy Cognitive are key catalysts," he wrote. "Unfortunately, the 3Q results suggest these will now be 2020 events putting some modest downward pressure on [earnings estimates for 2020]." Grossman rates the stock a buy with a $169 target price.
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The GTS weakness generated longer-term concerns for Bernstein's Toni Sacconaghi as well. "We worry that lower growth in GTS (~35% of total company revenues) risks undermining IBM's guidance of 4% to 5% revenue growth in fiscal 2020 and we are about $1 billion below consensus revenues for next year," he wrote. "We also note that GTS is a relatively high marginal contribution business, and that a weak top line can potentially severely impact profitability, as seen at DXC recently, even in the face of aggressive cost reduction."
He has a market-perform rating and $135 price target on the shares.
Wedbush analyst Moshe Katri called the company's results mixed, given that Red Hat revenue grew by more than expected while overall revenue fell short amid challenges for the IT services business. "The bottom line, IBM's massive $34 billion acquisition of Red Had is yet to provide a positive catalyst/trigger for IBM's overall top line growth," he wrote.
Katri has a neutral rating on the stock and lowered his price target to $155 from $165.
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MoffettNathanson's Lisa Ellis highlighted the challenges of determining "clean" revenue growth for IBM after adjusting for Red Hat on a pro-forma basis, as well as IBM's recent divestitures, the mainframe cycle, and foreign-exchange effects. She saw areas of concern in the company's disclosures including "so-so" cloud metrics outside of Red Hat while pointing to $7 billion in debt reduction as one of her positives. Ellis has a sell rating and $121 target price on the shares.
At least five analysts reduced their target prices on IBM's stock after the report. Of the 22 analysts tracked by FactSet who cover the stock, seven have buy ratings, 13 have hold ratings, and two rate the stock at sell. The average price target for IBM is $152.37, 7% above recent levels.
IBM shares have lost 6.7% over the past three months, as the Dow Jones Industrial Average has slipped 0.5%.
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