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Why IBM Is An Attractive Turnaround Bet

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Will International Business Machines manage to pull off a convincing recovery that some loyal Big Blue bulls suggest?

Once the kingpin of the technology universe, IBM has become a lumbering monolith whose stock has lagged behind its more spirited and sprightly peers, such as Facebook, Google and Microsoft. Currently trading at $145 a share, shares of IBM are way down from its high of $215 in 2013, and is also below its 52-week high of $179.

So is there a light at the end of the proverbial tunnel for IBM? Surprisingly, a number of devoted IBM believers remain undeterred in their optimism that hope definitely exists for the long-awaited IBM turnaround. So what’s holding it up? But there are also disbelievers who are as spirited in their disenchantment, who doubt that an IBM recovery is coming anytime soon.

One major reason for IBM’s travails is competition has been surprisingly fierce in the ever-expanding technology space.

“IBM competes in several concentrated and rapidly evolving markets, and faces competition from cognitive solution vendors, global business, and technology service vendors and systems vendors,” notes Arvind Ramnani, equity analyst at KeyBanc Capital Markets.

But even as he maintains a rating of “sector weight” on the stock, Ramnani argues that as IBM continues to transition its business model, “the pronounced near-term weakness could be an opportunity for patient investors.” He puts the stock’s “fair value” at $160 a share, based on 11 his 2019 earnings projection of $14.44 a share. IBM’s revenue growth in 2018 is positive and continues to be on a double-digit growth pathway, Ramnani points out in a recent note to clients. He sees IBM revenue growth continuing to accelerate in 2018 an 2019.

Nonetheless, he also points to certain risks that weigh on the stock, among them his contention that IBM failed to commercialize a “consistent stream of timely innovations” that Ramnani believes may adversely affect the company’s brand image, market share, and profit margins.

Even so, there are several IBM bulls who are still steadfast in their support of the stock, emphasizing that IBM is certainly in a better position now than in the prior year. The big question that investors are asking, however, is whether IBM’s efforts to reposition its business will pay off — and when it will come to fruition.

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Article Credit: Forbes

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