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IBM Downgraded to Strong Sell: What's Hurting the Stock?

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On Jul 12, IBM Corporation (IBM - Free Report) was downgraded to a Zacks Rank #5 (Strong Sell).

The downgrade can be attributed to an inconsistent revenue growth trajectory, slow transition to cloud, increasing competition and sluggish IT spending.

We believe that IBM’s significant investments into “Strategic Imperatives” – cloud computing, mobile, cognitive technologies and artificial intelligence (AI) – will take some more time to post credible top-line growth. Until then, we expect share price movement to remain muted.

Notably, IBM shares have massively underperformed the S&P 500 on a year-to-date basis. While the index has gained 8.5%, the stock has registered a negative return of 7.4%.

Strategic Imperatives: Slow Transition Impact Results

IBM is under pressure due to its time-consuming business model transition, which is negatively impacting results. Despite significant investments, the company is yet to gain a dominant position in the Infrastructure as a Service (IaaS), Platform as a Service (PaaS) and Hosted private cloud market.

Per data from Synergy Research, IBM lagged well behind Amazon Web Services (AWS) and Microsoft (MSFT - Free Report) in these markets at the end of first-quarter 2017.

Meanwhile, market research firm Gartner put IBM in the “Visionaries” quadrant along with Oracle (ORCL - Free Report) and Alibaba Cloud in its latest Magic Quadrant for Cloud Infrastructure as a Service, Worldwide report. This reflects execution problem at IBM, which is evident from sluggish revenue growth. Amazon Web Services and Microsoft are touted as the “Leaders.”

Apart from cloud computing, IBM has been gearing up to be a major force in the AI market with Watson. Despite expanding product offerings, partnerships, deal wins and significant investments, Watson has failed to be a game-changer – what many investors hoped it to be – at least in the near term.

Moreover, the Blockchain initiatives are still at nascent stages to contribute meaningfully to top-line growth. Further, sluggish IT spending and stiff competition in most of the markets are significant headwind, in our view.

Stock to Consider

Red Hat (RHT - Free Report) with Zacks Rank #1 (Strong Buy) is a stock worth considering in the broader sector. You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Red Hat is currently pegged at 14.90%.

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