International Business Machines Corporation (NYSE: IBM) is now less likely to generate long-term revenue growth without a meaningful shift in its portfolio, according to Morgan Stanley.
The IBM Analyst
Katy Huberty downgraded IBM from Overweight to Equal-Weight and reduced the price target from $170 to $155.
The IBM Thesis
Morgan Stanley’s proprietary surveys indicate a continued deceleration in IT budget growth in 2020, and enterprise hardware companies seem to be the hardest hit, Huberty said in the Friday downgrade note. (See her track record here.)
The analyst reduced her 2020 revenue estimate from positive 1% growth to negative 1.6%, adding that the AlphaWise CIO survey provided “new evidence” of core revenue declines at the company and a loss of market share in software and services.
IBM’s increased investment and more open approach to cloud following its acquisition of Red Hat had seemed to be a positive, Huberty said. Yet IBM’s positioning in cloud has not improved and “in some cases deteriorated over the past year,” she said.
IBM is likely to continue to lose market share as workloads increasingly move to public cloud, the analyst said.
Even after incorporating estimated synergies from the Red Hat acquisition, long-term revenue growth at IBM is now “less likely” without significant portfolio restructuring, she said.
Morgan Stanley cut its earnings estimate for IBM in 2020 from $13 per share to $12.80 per share to reflect “accelerated share losses and earnings risk.”
IBM Price Action
The stock was down 0.13% at $137.80 at the time of publication Friday.