IBM (IBM) announced its plans to spin off its managed infrastructure services businesses by the end of 2021. The narrow-moat company claims this will help its remaining business focus on its hybrid cloud solutions. We see little reason why the split would significantly boost IBM’s prospects in either business, although optically, IBM’s top-line growth rate should improve once managed infrastructure (named “NewCo” as a placeholder in the press release) is spun off. At this point, we are not assuming a drastically different business with the split from what we are modeling today. Additionally, IBM reported preliminary third-quarter results that were largely in line with CapIQ consensus. As such, we’re maintaining our $120 fair value estimate for IBM. Shares are up about 6% to $131 upon the news, leaving shares fairly valued, in our view.
While the remaining part of IBM’s business will aim to focus on hybrid cloud solutions, including Red Hat, we reaffirm our belief that an increasingly “mix and match” IT infrastructure world is working against IBM’s business that once found safety in its closed ecosystems. Even though having a hybrid IT infrastructure will be a lasting state for many of IBM’s customers, there are now many hybrid cloud platforms available outside of IBM, but also interoperability among them, which reinforces our negative outlook on the company.
On the flip side, concerning NewCo, we view managed infrastructure services as a dying business, and we’re skeptical that a spin-off will reinvigorate it. Revenue in this segment fell from $23 billion in 2018 to $21 billion in 2019 to only $19 billion in the trailing 12 months as of June 30. Today, IBM’s managed infrastructure services makes up the largest portion of IBM’s total revenue compared with any other subsegment, but it has been a headwind to growth. Meanwhile, IBM’s remaining business outside of NewCo earned $59 billion over the past 12 months.
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