Part of IBM's appeal has been relatively steady earnings growth despite uncertainty in corporate tech spending. But that looks to be undergoing a change, at least for a while, according to Goldman Sachs.
Downgrading IBM stock to neutral from buy, the firm wrote in a research note that "the company appears to be going through a challenging period that may limit operating earnings upside and produce more quarterly volatility than investors have been accustomed to."
The problem stems from IBM's increasing reliance on emerging markets, Goldman said. While they accounted for nearly a quarter of its revenues and drove 80 percent of its revenue growth from 2010 to 2012, those markets are stagnating, with constant currency growth of only 1 percent in the first quarter, the brokerage added.
"We are cautiously optimistic that the challenges in the growth markets will ease in short order, but for now, a key component of IBM's historically steady and predictable earnings growth is clearly facing pronounced pressure," Goldman analysts wrote.
The challenges are more evident in IBM's higher-margin software and services businesses, which could pressure profitability further.
IBM should be able to meet its 2015 EPS target of "at least $20," Goldman said, but doing any better would have to come from more M&A activity and gains from divestitures.
With the company's hurdles mounting, Goldman cut its revenue and earnings forecasts for 2013, 2014 and 2015. The analysts also assigned a lower multiple of 11 times 2014 earnings to IBM shares, down from 13 times. The new price target is $200 a share, versus $220 previously.
"Our lower multiple reflects our increased concerns over IBM's ability to generate steady earnings and cash flow growth as it has in the past," the analysts wrote.
Goldman Sachs makes a market in IBM securities and has had both investment banking and non-investment banking relationships with the company over the past 12 months.