IBM (IBM) Last Update 7/23/21
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% of Stock Price
Revenue
Gross Profits
Free Cash Flow
IBM
$145.83
Yours
Trefis Price
N/A
$128
Market
 
Top Drivers for Period
Key Drivers
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TREFIS Analysis


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RECENT NEWS AND ANALYSIS

Potential upside & downside to trefis price

IBM Company

VALUATION HIGHLIGHTS

  1. Cloud & Cognitive Solution constitutes 59% of the Trefis price estimate for IBM's stock.
  2. Global Technology Revenues constitute 19% of the Trefis price estimate for IBM's stock.
  3. Business Services constitute 14% of the Trefis price estimate for IBM's stock.

WHAT HAS CHANGED?

Impact of Coronavirus

IT software and Services industries are suffering from a fall in demand for software and web services as consumers are focusing solely on essentials and not discretionary products. That said, the industry has seen companies with a portfolio of software as well as services aimed at remote collaboration benefit due to the growing number of people globally. Many companies are also operating with employees working remotely from their own home.

Latest Earnings

For the Q2 2021, IBM's GAAP EPS was $1.47, down from $1.52 in the same period of the previous year. The Revenue was recorded at $18.7 billion, up 3% y-o-y (flat after adjusting for currency). For the quarter Total cloud revenue of $7 billion, up 13% y-o-y (up 9% y-o-y adjusting for divested businesses and currency). GAAP gross profit margin up 120 basis points; operating (non-GAAP) gross profit margin up 110 basis points. Net cash generated from operating activities was $4.9 billion. The company reduced debt by $6.4 billion since end of 2020.

KEY DRIVERS

Below are key drivers of IBM's value for IBM:

Software

Cognitive Solutions Software

  • IBM Cloud and Cognitive solutions software Revenues: We currently forecast the revenues from the sale of IBM's cognitive solutions software to increase to $25 billion by the end of the Trefis forecast period. We expect demand to pick up on the back of an increase in AI-enabled services around the globe, especially from legacy systems to newer standards and capabilities.

Services Business

Technology Services

  • Technology Revenues: We expect IBM's revenues to decrease marginally to ~$21 billion by the end of our forecast period, primarily due to the sale of outsourcing business in 2013 and move to cloud-based services.

  • Technology Services EBITDA Margin: We expect EBITDA margin to stabilize around the 16% mark.

For additional details, select a driver above or select a division from the interactive Trefis split for IBM at the top of the page.

BUSINESS SUMMARY

IBM makes money primarily through the sale of Cognitive Solutions Software and Technology Services such as Infrastructure & Cloud Services and Outsourcing. IBM's customers are large and medium-sized businesses worldwide.

Cognitive solutions software provides the basis for many of the company’s strategic areas, including analytics, security, and social. IBM has established the world’s deepest portfolio of data and analytics solutions, including analytics and data management platforms, cloud data services, enterprise social software, talent management solutions, and software solutions tailored for the industry. Watson Platform, Watson Health, and Watson Internet of Things capabilities are included in Solutions Software. IBM’s world-class security platform delivers integrated security intelligence across clients’ entire operations, including their cloud, applications, networks, and data, helping them to prevent, detect, and remediate potential threats.

Infrastructure and Cloud Services, offered under the Technology and cloud services (TCS) umbrella, are IBM’s offerings that support a company’s IT infrastructure with the use of IBM software and cloud resources. The portfolio includes a comprehensive set of hybrid cloud services and solutions to assist clients in building and running enterprise IT environments that utilize public and private clouds and traditional IT.

Many companies such as Alphabet, Microsoft, Accenture, Amazon are dabbling in the Cognitive solutions field. However, IBM has the first movers advantage. In the Infrastructure and Cloud Services, Amazon and Microsoft lead. But other providers such as Adobe also have a strong foothold in niche segments.

SOURCES OF VALUE

We believe that Cognitive Solutions Software and Technology & Cloud services are the most valuable segment of IBM due to:

First Movers Advantage

IBM has first movers advantage for offering AI-based Cognitive solutions to SME through the cloud. The advent of cloud-based services has resulted in a shift in revenue from maintenance to license renewal. Therefore, we expect the number of firms looking to deploy cognitive solutions in order to discover more trends in the data will grow in the coming years.

Recurring Technology & Cloud Services Revenues

Much of IBM's Technology and cloud services business is based on PaaS, IaaS, and SaaS services. These services are recurring in nature as a client tends to resign with an existing service provider. As a result, contracts and services are renewed on expiry. We believe IBM would be able to maintain steady cash flows, even in tough times, in a segment where it is the market leader.