Can IBM's Cloud Growth Outpace Declines In Its Core Business?

Deutsche Bank prefers to take a wait-and-watch approach on International Business Machines Corp. IBM shares, citing low earnings quality and decline in core business.

A Closer Look At The Quarterly Print

Despite quarterly results topping the Street's view and FY 2017 non-GAAP EPS guidance modestly above expectations, IBM’s profitability metrics continue to degrade and all segments, except technology services and cloud, saw organic sales declines.

Meanwhile, bulls will point to 11 percent growth in strategic Imperatives segment and 33 percent rise in cloud sales. The modest upside of the FY 2017 non-GAAP EPS guidance to Street suggests the business has bottomed.

“Despite these positives, sales remain negative when excluding acquisitions, and the profitability of the business continues to erode, with GMs down 180bps year-over-year and OpMgns down 160bps year-over-year,” analyst Sherri Scribner wrote in a note.

Notably, the fourth-quarter EPS beat was driven by a lower tax rate and higher IP income, which added roughly $0.50 to EPS.

Rating, Valuation And Movement

Scribner, who has a Hold rating on the shares, however, raised his price target by $5 to 150 on potential EPS upside from a lower expected tax rate and higher IP income.

At last check, shares of IBM were up 1.75 percent on the day at $169.73.