IBM's 1Q Earnings Face Headwinds From IT Budgets Uncertainty, Says Morgan Stanley Analyst

Morgan Stanley analyst Erik Woodring maintains an Equal-weight rating on International Business Machines Corp IBM with a price target of $143.
The analyst leans cautiously into earnings but does not expect a significant change to IBM's CY23 outlook next week.
He expects IBM to report relatively in-line 1Q topline results and keep CY23 revenue (low end of MSD growth) and FCF guidance ($10.5 billion, ex financing receivables) unchanged when they report earnings next Wednesday, with MS Software and Consulting trackers pointing to 1Q growth consistent with his forecasts.
Woodring remains cautious in the face of: 1) continued CY23 IT budget uncertainty, 2) incrementally more cautious Consulting read-throughs, and 3) IBM spending intentions from the 1Q23 CIO Survey that remain primarily negative.
IBM needs to print a nearly-pristine 1Q and give greater confidence in the 2H23 EPS and FCF ramp to support valuation; otherwise, any minor blemishes in the quarter will likely result in post-earnings stock weakness (and lower conviction in achieving CY23 expectations), despite IBM's relatively defensive profile.
Heading into the print, the 5 key metrics the analyst is watching include: 1) CY23 revenue growth and deal commentary, 2) Red Hat and TPP growth, 3) Consulting revenue and the quarterly book-to-bill, 4) PTI (payment to income) margins, and 5) 1Q FCF and CY23 FCF outlook.
Price Action: IBM shares closed lower by 0.44% at $130.46 on Tuesday.

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