IBM (IBM) reported a solid third-quarter result and notably improved its revenue trajectory. While it was good to see IBM improve its revenue trajectory, we had expected the result, given management’s prior guidance around the second half of the fiscal year. Still, with a positive reaction in afterhours trade, we think the market is cheered by the possibility of elusive future top-line growth. While we expect IBM to return to modest revenue growth over the midterm, we have pared back our overall growth and margin assumptions, as we think the turnaround in Global Business Services, or GBS, and Technology Services and Cloud Platforms, or TS&CP, will be more prolonged than originally thought. Nevertheless, we do expect an eventual improvement in these businesses and still rate IBM as having a strong embedded position in the IT services (business and technology services) and cloud markets. In addition, early signs point to an improved outlook for the Systems business based on good demand for IBM’s new z14 mainframe and storage products. The z14 is particularly interesting given its pervasive encryption capabilities and suitability for in-demand usage around machine learning and Blockchain. Overall, our long-term view on IBM remains unchanged and we reiterate our $158 fair value estimate and narrow economic moat rating. With shares approaching our fair value in afterhours trade, we’d seek a wider margin of safety before investing in the name.

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