IBM Had A Strong Q3, But Some Analysts Have Lowered Estimates On The Stock - Here's Why

BMO Capital Markets analyst Keith Bachman reiterated the Market Perform rating on International Business Machines Corporation IBM, raising the price target to $155 from $152.

IBM registered Q3 revenue of $14.752 billion versus estimate of $14.73 billion. 

On the positive side, Bachman highlights IBM's strategy, which focuses on investing in growth areas with a long-term view.

 FCF was above the analyst's expectations, and Bachman increased confidence in IBM in reaching its $10.5 billion target for FY23. 

Automation growth was good at 13% y/y CC, helped by the Apptio closing, the analyst adds.

Overall, according to the analyst, IBM can garner mid-single-digit Software growth on an organic basis, with TPP growing 1-2% y/y on a sustainable basis. 

On the flip side, Red Hat decelerated below double-digits, hurt by its consumption business, though TPP growth remained solid at mid-single digits, the analyst notes.

Bachman writes it may take a few quarters to return to double-digit growth in Red Hat.  

The analyst expects margin challenges to persist for IBM. In the recently reported quarter, Margins were hurt versus expectations by less FX.

The analyst lowered the FY23 revenue estimate to $61.713 billion from $62.332 billion, reducing the EPS estimate to $9.48 from $9.60.

RBC Capital Markets analyst Matthew Swanson reiterated the Outperform rating on IBM, lowering the price target to $179 from $188.

Macro commentary around the consulting space sounded more positive than peers as highlighted by a >1.15 book-to-bill ratio with 32% bookings growth vs. 24% q/q, the analyst writes.

Overall, a good but not great quarter from software as ARR reaches $14 billion, +7% y/y, Swanson adds.

The analyst lowered the FY23 revenue estimate to $61.680 billion from $61.936 billion, reducing the FY23 adjusted EPS estimate to $9.51 from $9.54.

Price Action: IBM shares are trading higher by 5.00% to $143.93 on the last check Thursday.