IBM Needs To Get Investors Ready For A Hard, Brave Crossover To A Cloud Model

• Shares of International Business Machines Corp. (NYSE: IBM) have declined 22.56 percent over the past six months, to a low of $131.17 on January 13.
• Barclays’ Mark Moskowitz has maintained an Underweight rating on the company, with a price target of $146.
• Moskowitz mentioned that the company was likely to report better-than-expected December quarter numbers when it announces its results on January 19.

Analyst Mark Moskowitz explained that the better-than-expected results could be due to the December quarter being “more transactional in nature, i.e., more levers to pull,” while adding, “Our research continues to indicate middleware is a thorn for the long-term growth profile.”

As customers move their workloads to the cloud, middleware, would not be as important as it used to be.

Moskowitz stated that to become more constructive on the stock either if IBM could either show a turnaround or significantly cut its full year EPS outlook and prepare investors for a “hard, brave crossover” to a cloud model that includes less services and upfront maintenance lock-in.

“IBM's annualized cloud-based revenue run rate is nearly $7bn, currently. If that figure could climb toward $15-20bn, then investor sponsorship may be restored in the years ahead,” according to the Barclays report.

Moskowitz expects the stock to trade down over the next 30 days, and said that although IBM’s estimates have been reduced for the second time in three months, he would “prefer to wait for one or more positive sign posts of a potential bottoming given prevailing secular and macroeconomic pressures.”