uploads/2016/02/MS-estimagtes1.png

Why Did IBM’s Stock Get Upgraded to “Buy”?

By

Updated

IBM is a “buy”

IBM (IBM) of late has generated a lot of news. First, it announced a $2.6 billion acquisition of Truven Health Analytics. The same day, IBM’s stock got upgraded from “equal weight” to “overweight” by Katy Huberty at Morgan Stanley. IBM is now a “buy,” with a price target of $140.

Article continues below advertisement

Factors that led to IBM’s stock upgrade

IBM’s Strategic Imperatives (which refers to its investments and initiatives in cloud, analytics, mobile, social, and security technologies) continued to post double-digit growth in fiscal 4Q15. Strategic Imperatives grew by 17% in 2015, while their contribution rose to 35% in fiscal 2015. (In 2014, this segment’s contribution stood at 27%. By comparison, Microsoft (MSFT) derived 36% of its total revenue in 2015 from cloud computing.) IBM’s recent acquisition of Truven will likely contribute significantly toward the growth of Strategic Imperatives.

Although Amazon (AMZN) continues to lead overall in the cloud space, within the private and hybrid cloud space, IBM (IBM) continues to be a leader. Further, Huberty argues that the market has “underappreciated” IBM’s growth potential, which is reflected in its share prices. She highlighted growth in Strategic Imperatives in 2015 and believes that, in comparison to its peers, IBM is transitioning at a faster pace toward rapidly growing segments. Perhaps most importantly, Huberty is of the opinion that IBM will post revenue growth from 2019 onward.

Investors interested in gaining exposure to IBM might consider investing in the SPDR S&P 500 ETF (SPY), which has an exposure of 8.7% to application software and invests ~0.7% of its holdings in IBM.

Continue to the next part for an analysis of what other analysts are saying about IBM’s stock.

Advertisement

More From Market Realist