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IBM Rated Buy at Jefferies on Potential for Revenue Rebound

Jefferies analyst Kyle McNealy started his coverage of IBM with a buy rating and $170 target price.
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International Business Machines  (IBM) - Get International Business Machines (IBM) Report shares rose Friday, after shares Jefferies analyst Kyle McNealy started his coverage of the struggling technology giant with a buy rating and $170 target price.

That’s based on fundamentals: He says revenue can rebound. “We see a strong demand environment driven by pandemic recovery and enterprise focus on digitization and digital resiliency,” McNealy wrote in a commentary cited by Barron’s.

“After years of transition, we see a solid path for IBM to outperform growth expectations, driven by increasing cloud mix in the business, recent strategic actions catalyzing revenue growth, and a leading portfolio to deliver multi-cloud solutions.”

Shares of the Armonk, N.Y., company recently traded at $143.78, up 3.5%. It has climbed 14% year to date but has slid 10% over the past five years.

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IBM sits “at the convergence” of many major technology trends for big companies, such as cloud services, security, data analytics and artificial intelligence, McNealy said.

A proprietary survey of IT resellers showed IBM is “the third most considered public-cloud vendor,” trailing only Microsoft  (MSFT) - Get Microsoft Corporation (MSFT) Report and Amazon  (AMZN) - Get Amazon.com, Inc. Report, he said.

Morningstar analyst Julie Bhusal Sharma puts fair value at $125 for IBM.

“We think clients will gradually reduce their IBM offerings, from infrastructure as a service to software to outsourcing functions (like payroll processing and talent management), as competitors’ value add lowers the cost of switching from IBM products,” she wrote in a June commentary.

“Fortunately for IBM, we think its enterprise customers are particularly sticky, especially as IBM tends to serve very large customers within regulated industries. Therefore, any change with IBM will be a slow one.”

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