IBM is facing tough digital-transformation comps, and decelerations in Red Hat and consulting looks increasingly likely, wrote UBS analyst David Vogt.
David Paul Morris/Bloomberg
International Business Machines
stock is coming under selling pressure on Tuesday after UBS analyst David Vogt cut his rating on the stock to Sell from Neutral, asserting that the Street has become too bullish on the company’s turnaround story.
Vogt trimmed his price target on IBM (ticker: IBM) to $124 from $136.
IBM CEO Arvind Krishna has been working to return IBM to growth, among other things spinning off its managed-services business Kyndryl (KD) to shareholders. IBM expects to report mid-single-digit top-line growth starting in 2022.
But Vogt thinks the market has already priced in the turnaround. He writes in a research note that the stock is now trading at more than 14 times his forecast on pro forma next-12-months profits of $9.47 a share, above its average valuation over both the last three- and five-year periods. Vogt contends that current valuation suggests the market is pricing in 2022 and 2023 earnings estimates 10% higher than his current estimates. He also says that IBM’s multiple has benefited from a rotation from growth into value, “creating risk.” And he sees risk to fourth-quarter results.
Vogt says some valuation expansion was expected post the Kyndryl spin, but he sees potential for substantial downside if the stock reverts to trading at 10 times revenue. He sees growth of 3.4% this year and 3.1% next year, which is below IBM’s mid-single-digit range. Vogt says that about 50% of IBM’s revenue—software aside from Red Hat and infrastructure—faces “secular headwinds” and is unlikely to grow long term.