Shares of tech giant IBM (IBM) are down at the time of writing after the company reported slower growth in its main cloud software business. Even though IBM increased its revenue outlook for the year, investors focused on the weak results in software, which many see as the key driver of future growth. More specifically, growth in Red Hat, IBM’s hybrid cloud unit, slowed to 14% from 16% in the prior quarter.
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Analysts at J.P. Morgan, led by five-star analyst Brian Essex, said that the performance of IBM’s software division is especially important because it contributes heavily to earnings and overall company value. With mainframe sales expected to slow after this year’s peak, IBM will need stronger software results to keep up its overall growth rate. Still, the stock is up about 30% this year and trading at a forward P/E of more than 23x, compared with almost 18x for competitor Accenture (ACN).
However, not all of the news was negative. For instance, IBM’s infrastructure unit, which includes its mainframe systems, reported a 17% revenue increase to $3.56 billion, thereby helping the company beat Q3 earnings estimates. Analysts also pointed to acquisitions as a possible strategy to boost future growth. In fact, Evercore ISI’s five-star-rated Amit Daryanani highlighted that IBM’s strong cash flow and balance sheet give it room to make deals, which could act as a catalyst.
Is IBM a Buy, Sell, or Hold?
Turning to Wall Street, analysts have a Moderate Buy consensus rating on IBM stock based on four Buys, six Holds, and one Sell assigned in the past three months, as indicated by the graphic below. Furthermore, the average IBM price target of $286.20 per share implies 3.2% upside potential.
