Shares of International Business Machines Corporation (IBM) jumped on Wednesday after a team of bulls on the Street forecast that growth opportunities in the analytics and cloud computing space would pay off in 2020.
In a note to clients on Tuesday, UBS lifted its rating on shares of IBM to Buy from Neutral, indicating that the legacy tech giant is positioned to report earnings above expectations next year. Analyst John Roy increased his 12-month price forecast to $180 from $160, implying an 18% upside from Tuesday's close. His most bullish scenario of a $197 per share price calls for a near 30% return.
(See also: Berkshire Hathaway Has Exited IBM: Buffett.)
Trading 2.4% higher on Wednesday afternoon at $152.55, IBM shares have fallen 0.6% year-to-date (YTD), underperforming the S&P 500, up 9.4% over the same period.
Market Underestimating Hardware, Growth Opportunities in Analytics and Cloud
While the Street has hammered IBM shares, fearing its declining hardware business, Roy suggests that the sentiment is overly pessimistic. The analyst's discounted cash flow analysis indicates that the market is pricing-in a 2% decline in sales, a stat that Roy believes IBM can beat, Barron's reports. Meanwhile, Roy's sum-of-the-parts model also suggests investors assign little to no value for IBM's hardware business, which he views as "unrealistic."
“IBM is operating better but we believe the multiple could expand as it beats expectations on Analytics and Cloud,” Roy says. He expects IBM's cloud computing arm, which competes against the likes of market leader Amazon.com Inc.'s (AMZN) AWS, to serve as a key growth driver. Roy also highlighted IBM's sales growth of 22% in 2017 and its position as number four in the growing cloud industry. Other positive catalysts include improving operating margins, the bottoming of a "hype cycle" surrounding IBM's Watson artificial intelligence (AI) offering, and a solid dividend.
UBS projects IBM's 2019 earnings per share (EPS) at $14.25, compared to the consensus estimate at $14.04.
As for the pushback, Roy reports that cloud industry consolidation, foreign exchange headwinds, and difficult computer sales are already well priced into IBM's stock.
(For more, see also: IBM Working on ‘Stablecoin’ Tied to US Dollar.)