Goldman Says It Will Be 'Constructively Biased' On IBM If This Happens

Shares of IBM have underperformed the market over the past year as the company has been facing both company-specific headwinds (i.e maintaining a portfolio skewed towards legacy offerings) and secular industry pressures (i.e cloud computing) that have resulted in shares trading significantly lower from their 52-week highs of $195.00. In a report published Monday, James Schneider of Goldman Sachs initiated coverage of IBM with a Neutral rating and $200 price target as it is "too early" to be "outright positive" on the stock for the time being. Schneider pointed out that IBM's revenue declines have been driven by a market shift to cloud-based software models and it is uncertain if the company can return to revenue growth moving forward. The analyst added that while the company could return to growth "at some point" in 2016, it is only possible if core declines do not deteriorate beyond the 12 percent year over year level seen in the second quarter 2015. Schneider further noted that IBM ranks as "one of the most structurally underweight names" in large-cap tech with nearly 60 percent ownership among index and non-institutional funds. The analyst also added that IBM's stock has appeared as a "very important short" in Goldman Sachs' portfolio tracker for 11 consecutive quarters. However, Schneider did note that IBM is undergoing "Strategic Imperatives" which appears to be resonating well based on discussions with many CIOs who suggested that IBM is "maintaining its relevance" with customers, especially relative to other legacy tech vendors. The analyst added that IBM is taking the "necessary" steps to re-position its portfolio towards analytics, cloud, and engagement offerings which represent a "significant incremental opportunity" that will be "increasingly vital" to the company's financial health over the next 10 years. "While we believe IBM's progress in these initiatives has been encouraging, we recognize that the company is still in the early stages of this transition and will likely need to continue investing heavily both organically and through M&A to balance significant declines in its core business," Schneider concluded. Bottom line, Schneider stated that he could potentially become "constructively biased" if IBM's fundamentals, particularly revenue, inflect in 2016.