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Edward Jones analysts downgraded IBM (NYSE:IBM) to Hold from Buy in a note to clients Monday, telling investors that the firm thinks the shares are appropriately valued.
The analysts acknowledged that IBM has largely been successful in reorganizing its business to focus on the faster-growing end-markets of software and consulting following the spinoff of its infrastructure-management business.
“With this change, IBM’s growth prospects are more appealing to investors and have led to a higher stock price,” stated the analysts.
They added that after spinning off its managed infrastructure business, IBM should deliver stronger growth.
“The slimmed-down company will have a greater focus on software and cloud services, which should result in 4%-6% growth over the long term. We believe higher growth rates should result in IBM being more highly valued,” the analysts argued.
However, they believe that with the business transformation complete and the stock increasing because of potentially faster growth, think shares currently reflect the firm’s growth expectations and “are appropriately valued.”
“IBM is trading at around 14 times our 2023 earnings estimate, above its average of 11. We believe a higher P/E ratio is warranted given the shift to more cloud services. IBM has underperformed technology stocks over the long term because the company has struggled to offset declines in its older business, resulting in lackluster growth,” said the analysts.
