IBM Broke Its Losing Streak. Now What?

IBM (IBM) was finally able to post positive year-over-year revenue growth during its fourth quarter. The result broke IBM’s 22 consecutive quarter decline streak and finally signifies the tipping point where “Strategic Imperatives” growth is outweighing declines or stagnation in non-strategic businesses. However, the positive revenue result doesn’t come as a surprise and we had expected such an outcome based on the size of the Strategic Imperatives business, the Systems sales cycle, and the timing of services contract ramp-ups. For the quarter, Strategic Imperatives revenue grew 14% year over year and contributed to 46% of IBM’s total revenue. The result was driven by continued momentum in the cloud and security businesses, representing significant demand for cloud-based infrastructure and software, and heightened IT security concerns. With healthy demand for such services expected to continue over the midterm, we think IBM has turned the growth corner and can post modest full-year revenue growth over the coming years. Still, this growth outlook, much like our competitive assessment of the firm, is unchanged. As a result, we reiterate our $168 fair value estimate and narrow economic moat rating. With the stock recently approaching our fair value estimate, we’d seek a wider margin of safety before investing new capital in the name.

For the quarter, total revenue rose 4% year over year to $22.5 billion (increased 1% in constant currency). Cognitive Solutions revenue was flat year over year at $5.4 billion. Within the business, traditional analytics products like data integration and content management were weak. Still, IBM continues to build out its Watson solutions software and saw good demand for these products, which is encouraging given the marketing and hype surrounding these initiatives.

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