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IBM Fell Short of Expectations. Now What?

Shares of the technology giant International Business Machines (IBM) came under pressure on Thursday, declining about 4.9% in the pre-market session after its Q3 revenues fell short of the Street’s expectations. 

IBM’s Q3 revenues of $17.62 billion improved marginally on a year-over-year basis but missed the analysts’ estimate of $17.77 billion. Meanwhile, its adjusted EPS declined 2.3% to $2.52. However, it came in ahead of Wall Street’s estimate of $2.50. 

IBM’s CFO and SVP, James J. Kavanaugh, stated that clients paused on new project activity in the GTS (Global Technology Services) division ahead of the separation. That weighed on its overall revenues. 

Last year, IBM announced that it would separate its managed infrastructure services (a unit of GTS) into a new public company named Kyndryl. Earlier this month, IBM’s board approved the separation. (Read more: IBM Board Approves Kyndryl Separation)

The move is likely to augment growth at its Hybrid Cloud and AI (artificial intelligence) Solutions business, which is why I maintain a Bullish view on IBM stock.

Commenting on the separation, Kavanaugh added that “our post-separation portfolio mix is shifted toward our growth vectors, with a higher-value recurring revenue stream and strong cash generation, allowing us to continue to invest in the business and provide attractive shareholder returns.”

Equally confident about IBM’s post-separation prospects is Wamsi Mohan of Bank of America Securities, who expects the original company to achieve its growth targets. Mohan reiterated his Buy rating on IBM, as he expects a “potential re-rating” of IBM shares after the spin-off. 

The analyst expects “IBM to take share in IT spending with its Cloud and AI initiatives” in the long term. However, Mohan lowered his price target to $172 (21.2% upside potential) from $176.  

Alongside Mohan, the rest of the Street remains upbeat on IBM. It sports an analyst rating consensus of Strong Buy, based on 4 Buys and 1 Hold. However, it scores only a 7 out of 10 from TipRanks’ Smart Score rating system, indicating it will likely perform in line with the market. 

See Top Smart Score stocks >>

Meanwhile, the average International Business Machines price target of $166.60 implies 17.4% upside potential to current levels.

Disclosure: On the date of publication, Amit Singh had no position in any of the companies discussed in this article.

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