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Can a start-up break out of IBM's slow, sticky core?

00/05/1995. LONDRES : LA MAISON DES PAPILLONS
Marc Deville | Gamma-Rapho | Getty Images

IBM's entrenched services let it cling to clients while newer, agile companies took the lead on the software-as-service revolution. But IBM has its own cutting-edge tech in the works — and Wall Street will look for signs in the tech giant's earnings report Monday of start-up-like speed.

IBM's first-quarter earnings will mark the debut report under a new segment structure, which emphasizes cloud computing and "cognitive solutions" over sales, services and hardware. Cognitive solutions may not be at the core of IBM's business yet, but results will shed light on whether Big Blue can pull off its pivot toward software-as-service as enterprises shift their technology strategies to the cloud.

"IBM's large, profitable, and sticky core operations will protect it from any precipitous slide in competitive positioning, but ... we have concerns about the economics and competitive dynamics of its newer initiatives," wrote Morningstar equity analyst Andrew Lange, who has a $145 price target on shares. "IBM needs to continually evolve to the rapid evolution of the IT landscape and adopt a more agile startup type mentality, rather than be burdened by slow-moving bureaucracy."

IBM has continued to see momentum in its services as it moves to clients to the cloud, signing 40 percent more deals over $100 million last year from 2014, IBM senior vice president and CFO Martin Schroeter said in the latest earnings call.

"We've seen reports that suggest the adoption of cloud means shrinking deal sizes, but this is not what we are seeing," Schroeter said. "Clients are looking to transform their most critical systems into hybrid cloud environments, and the complexity of these partnerships in many cases results in larger engagements."

But the legacy tech giant is expected to report a 28 percent year-over-year decline in earnings per share and a 7 percent year-over-year decline in revenue, with earnings of $2.09 per share on sales of $18.3 billion, according to Thomson Reuters consensus estimates.

IBM is in the midst of a self-proclaimed transformation. Cloud, analytics, mobile, social and security represented 35 percent of IBM as of the fourth quarter of 2015, and since then, the company has closed several relevant acquisitions aimed to grow that share to 40 percent by 2018.

"IBM has been doing an awesome job of re-engineering themselves and focusing on cognitive, investing in the cloud, buying new sources of data like the Weather Company," said Crawford del Prete, chief research officer at IDC.

Morgan Stanley analysts raised their price target to $168 from $140 for IBM shares at the end of March, but kept their overweight rating on the stock, citing a path — if far-off and foggy — to monetization of artificial-intelligence software Watson.

"Currently, IBM trades more in-line with hardware peers, like Cisco and EMC," wrote Morgan Stanley's Katy Huberty. "As investors begin to appreciate Watson's lead in cognitive computing, which is more skewed toward software and services than hardware, and the company shows improving growth on the back of recent investments, we see shares trading toward the low end of software and services peer averages."

Watson, a data processing platform that learns and understands speech, is expected to win double the new customers in 2016 than it did in 2015, when it scored clients like Honda, Hilton, KPMG and Turner Broadcasting, according to Morgan Stanley. But Huberty remains cautious.

Watson already has one notable cheerleader: Warren Buffett, who told CNBC he thinks IBM will be worth more money in five or 10 years.

"We've never sold a share of IBM," Buffett told CNBC in February. "We're a potential buyer."

Still, Buffett's comrade at Berkshire Hathaway, Charlie Munger, has said he's neutral on the company for now. Amit Daryanani of RBC Capital Markets gave a similar lukewarm assessment in a note Friday: IBM could be the best again, but maybe it's not there yet.

"In our view, IBM represents the best mix of technology businesses in the enterprise segment," said Daryanani. "However, top-line growth should remain limited near term. ... Overall, we think investors should remain on the sidelines until better signs of positive revenue growth emerge."