Send me real-time posts from this site at my email

Why IBM Stock Dropped Today

What happened

Investors in International Business Machines (NYSE: IBM) are feeling "big blue" today -- and not in a good way. As of 10:10 a.m. ET, shares of the computing giant are down 4.1%.

You can blame another three-letter company -- UBS -- for that.

Image source: Getty Images.

So what

Swiss megabank UBS downgraded IBM stock to a sell rating this morning, you see, and cut its price target on the tech giant to $124 per share -- $5 below where it trades even after this morning's sell-off, which implies there may be even more pain to come.

Citing lower earnings estimates and "an elevated valuation" (although truth be told, IBM only costs about 24 times trailing earnings, considerably cheaper than the S&P 500 as a whole), UBS sees the shares as "vulnerable over the next 12 months."

Now what

UBS estimates that IBM will earn only about $9.47, pro forma, per share this year, well below the stock's $10.30 consensus earnings target on Wall Street. As the analyst explains in today's note on, when valued on these forward earnings, the stock's 14 times forward P/E ratio (which, remember, is different from the trailing P/E ratio) has IBM trading at least three points above "its trailing 3- and 5-year average" valuation "despite a history of execution issues."

In the analyst's opinion, given IBM's history, the stock doesn't deserve this premium valuation, and doesn't deserve the benefit of the doubt about it meeting or beating consensus estimates this year. Worse, UBS predicts that once investors realize this and resume valuing IBM stock at closer to 10 times forward earnings, rather than 14 times, the stock could fall as much as 20%.

If the analyst is right about that, then IBM's sliding stock price may not stop at today's 4% decline, or even at the further 4% implied by even UBS's new price target. A 20% slide would take IBM stock all the way down to $107.

Look out below.

10 stocks we like better than IBM
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now... and IBM wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of January 10, 2022

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


Popular posts

Welcome! Is it your First time here?

What are you looking for? Select your points of interest to improve your first-time experience:

Apply & Continue