It’s Finally Time to Be Bullish on IBM — for 2020

September 26, 2018 by Jon C. Ogg

The typical morning’s analyst upgrades and downgrades rarely seem to offer much good to say about International Business Machines Corp. (NYSE: IBM). Maybe nothing lasts forever, and that may even include analysts and investors thinking poorly of IBM for so many years. It turns out that IBM just landed a big analyst upgrade.

UBS raised its rating on Big Blue to Buy from Neutral and its price target to $180 from $160. This implies upside of almost 21% from the $148.91 prior closing price, and total return investors would count IBM’s 4.2% dividend yield in their analysis to get a total return upside of about 25%.

What matters here is that analysts on Wall Street generally assign 8% to 10% in implied upside on Dow Jones industrial average and most S&P 500 stocks at this stage in the bull market and with the market basically at all-time highs. If UBS is correct, IBM has more than twice of the upside of most analyst upgrades on these large-cap companies. And UBS was closer to the Thomson Reuters consensus analyst target price of $162.42 ahead of this call.

UBS analyst John Roy is now positive after a deep dive into IBM Analytics, Cloud and Services out in 2020, but the call does warn of very little chance of revenue growth in 2019. Several key metrics were cited in Wednesday’s upgrade:

  • Artificial intelligence (AI) and machine learning could add $400 million to 2019 sales.
  • Watson hype cycle is expected to bottom this year.
  • Margins actually could improve due to better service unit performance.
  • And the 4.4% dividend yield should act to create a floor for the stock.

IBM recently expanded its AI by offering new Watson solutions that effectively come pre-trained for industries. This was also days after IBM announced a new software service that gives businesses more transparency into AI decisions. IBM even indicated that research from the IBM Institute for Business Value indicated that 82% of businesses are now considering AI deployments. Many investors also have looked beyond the cryptocurrency hype to evaluate the future of blockchain, and they generally consider IBM’s blockchain efforts to be superior to that of many other companies.

IBM shares were last seen trading up 1.9% to $151.80 Wednesday morning. IBM has a 52-week trading range of $137.45 to $171.12, and this stock has largely been in a trading band of $140 to $170 for most of the past four years.

As a reminder, the Dow Jones industrial average is a price-weighted index, and that makes IBM shares more dominant in the index. Its $150-or-so price gives IBM the tenth highest weighting of the 30 Dow stocks with a 3.8% index weighting. On the other side of the coin, the S&P 500 has an adjusted market cap weighting and the $136 billion market cap has IBM ranked as the 37th highest.