IBM Faces Challenging 2025 First Quarter Amid HashiCorp Deal Impact
$IBM(IBM)$
In April, IBM agreed to purchase $HashiCorp, Inc.(HCP)$ for $35 a share in a deal with an enterprise value of $6.4 billion. The deal, which the computer hardware and software firm planned to finance with cash on hand, is expected to complete by the end of 2024, it said at the time.
$UBS Group AG(UBS)$
The Street's consensus "faces incredibly tough" comparisons and is likely to be revised down to 3% to 4% growth, UBS analysts led by David Vogt said in a note emailed Monday. The HashiCorp acquisition is likely to be $0.30 per share dilutive in 2025, as IBM's earnings before interest and taxes are "expected to be roughly flattish while the cash financing impacts interest income," according to Vogt.
The sale of IBM's Weather assets to Francisco Partners in the first quarter of 2024 resulted in a one-time tailwind of 167 basis points to margins and lifted EPS by $0.22, UBS said. The technology giant benefited from an "unsustainably low" adjusted tax rate of 5.7% in that quarter, while UBS currently estimates a tax rate of 14% for the first quarter of 2025.
IBM is scheduled to report its third-quarter results later in October. UBS expects the company to report adjusted EPS of $2.10 and revenue of $14.94 billion. The Street is currently looking for normalized EPS of $2.22 and revenue of $15.04 billion, according to the brokerage. On an organic foreign-exchange neutral basis, the brokerage sees revenue growth at 2.8% about one percentage point slower than the 3.8% increase IBM logged in its second quarter.
For the fourth quarter, IBM is projected to post adjusted EPS of $3.77 and revenue of $17.79 billion, according to UBS, which put market estimates at $3.80 and $17.9 billion, respectively. The brokerage predicts that IBM will reiterate its full-year 2024 guidance for constant currency revenue growth to be consistent with its mid-single-digit model and free cash flow of more than $12 billion.
UBS has a sell rating on IBM's stock with a price 12-month price target of $145.
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