IBM’s Cloud Business Likely To Gain Prominence Ahead Of The Red Hat Deal Closure

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IBM: International Business Machines logo
IBM
International Business Machines

IBM (NYSE:IBM) reports its Q2 results on Wednesday, July 17. The company’s Q1 had beat consensus expectations on EPS despite coming in lower than consensus expectations on revenue. We will be listening in on updates around the following key factors as a part of the Q2 results:

  • Red Hat deal closure: With IBM having secured approval for the Red Hat deal across many geographies, we expect the management to provide a more targeted plan about Red Hat and how it will be integrated into its existing business model.
  • Segment level changes: IBM had announced changes to its reporting segments last quarter. We will be expecting management comments about whether any further changes would be needed, and how Red Hat could benefit from the new reporting structure.
  • Positioning in the cloud market: IBM had disclosed that its cloud business was growing at more than 12% on a TTM basis. We will be looking to get a sense of traction in the current business and how IBM’s focus is likely to evolve post the Red Hat deal.

Per Trefis, IBM shares have a fair value of $145, which is slightly ahead of the current market price. Our interactive dashboard on IBM’s Price Estimate outlines our forecasts and estimates for the company. You can modify any of the key drivers to visualize the impact of changes on its valuation, and see more Trefis technology company data here.

IBM’s Sources Of Revenue And Trends

  • Cognitive Solutions: This segment houses solutions software and transaction processing software, and is aimed at helping organizations identify actionable insights for decision making. The solutions software offerings include enterprise grade AI solutions, IoT solutions, cloud data services, data processing and analytics solutions and the Watson Platform. The transaction processing software provides mission-critical systems for industries such as banking, airlines and retail. Cognitive Solutions contributed 22% to IBM’s 2018 revenue. We expect the segment to grow at a CAGR of 12% over coming years to reach $23 billion in revenue in 2020 from $18.5 billion in 2018
  • Global Business Services (GBS): This division houses IBM’s consulting, application management and business process services businesses. IBM has been leveraging GBS to help clients deploy the company’s Cognitive Solutions. Global Business Services contributed 20% of IBM’s 2018 revenue. We expect the segment to grow at a CAGR of 1% over coming years to reach $17.2 billion in revenue in 2020, from $16.8 billion in 2018
  • Technology Services & Cloud Platforms (TS&CP): Segment offerings include IT infrastructure and platform services, technical services and integration software to help transform clients’ business requirements. Technology Services & Cloud Platforms contributed 46% of IBM’s 2018 revenue. We expect the segment to decline at a compounded rate of around 1% over coming years to reach $38.1 billion in revenue in 2020, from $38.9 billion in 2018
  • Systems Hardware: This division sells IBM’s servers, storage systems and operating systems software. Systems Hardware contributed 10% of IBM’s 2018 revenue. We expect the segment to grow at a CAGR of 1% over coming years to reach $8.2 billion in revenue in 2020, from $8 billion in 2018
  • Global Financing: This division offers credit to clients to help consume IT assets, short-term working capital financing to IBM’s partners and refurbishing of used or surplus IT assets to be resold. Global Financing contributed 2% to IBM’s 2018 revenue. We expect the segment to decline at a compounded rate of 3% over coming years to reach $1.7 billion in revenue in 2020, from $1.8 billion in 2018.
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We forecast IBM’s EPS figure for full-year 2019 to be $12.00. Taken together with our forward P/E multiple of 11 for the company, this works out to a $145 price estimate for IBM’s stock, which is roughly around the current market price.

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