KD - JP Morgan starts IBM at neutral sees transformation AI benefits offset by headwinds

2023-07-07 07:57:40 ET

Investment firm J.P. Morgan started coverage on IBM ( NYSE: IBM ) on Friday with a neutral rating, noting that the company's continued transformation and benefits from artificial intelligence are likely to be offset by headwinds in the consulting and mainframe businesses.

Analyst Brian Essex, who also put a per-share price target of $145 on IBM ( IBM ), said the company is "cleaner and easier to follow" after the spinoff of its managed infrastructure services business into Kyndryl ( KD ), as it now generates more than 70% of its revenue from the higher-growth software and consulting businesses.

"We forecast fundamental improvement in the back half of the year, but think the setup for the stock could be challenging as investors continue to weigh risk to numbers from potential macroeconomic and mainframe cycle headwinds," Essex said in the investor note.

Though IBM ( IBM ) trades below its peers in its core markets, Essex conceded that the company has made "meaningful" improvements in margins over the past few years and the company looks "well positioned" for the hybrid cloud and digital transformation.

"We expect enterprises will continue to prioritize Hybrid Cloud and Transformation initiatives, as accelerated efforts across the industry, have begun to deliver tangible results," Essex added.

In addition, Essex sees Watsonx, the company's generative AI platform, as a "potential game changer with meaningful upside" and possibly contribute "meaningful" revenue as soon as next year.

IBM ( IBM ) shares were little changed in pre-market trading on Friday.

More on IBM

• IBM: Acquiring Apptio, Dividends, AI, And Collaborations Position It For Future Upside
• IBM: Apptio Deal To Reverse The Simplification Process
• IBM: High Free Cash Flow And Yield, But Limited Growth Expected

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