Big Blue has a cash flow problem: Analyst

Adam Jeffery | CNBC

IBM is weighing on the broader market Tuesday after one analyst downgraded the software and services giant to "underperform."

"We believe the company will be fundamentally challenged to grow revenue organically, as it is faced with a weakening organic revenue base and an increasingly less effective M&A strategy," Credit Suisse analyst Kulbinder Garcha wrote in a research note.

Garcha points to IBM's exposure to softening mainframe and Unix hardware and software, potential risks from the shift to cloud computing and difficulty in acquiring new growth given more expensive multiples in the software industry as reasons for concern about future growth.

While IBM was the second-largest software company after Microsoft last year, it has a fragmented business and it continues to lose market share to competitors like Microsoft, Oracle, SAP and Salesforce.com.

(Read more: IBM: A victim of slowing emerging markets growth)

IBM may also have a cash flow problem. The Credit Suisse analyst said investors should focus on IBM's 59 percent free cash flow conversion rate which has deteriorated every year since 2009 and now is the lowest in big-cap technology excluding Intel.

While IBM shares trade at a 20 percent to 25 percent discount to the S&P 500 on price-to-earnings basis, this discount may be misleading given the cash flow issues. The stock trades at a 35 percent premium to the broader technology industry when looking at free cash flow, according to Garcha.

Moreover, Garcha writes that IBM will have less flexibility to buy back its shares which "on average have accounted for 40 percent of EPS growth."

Garcha cuts his price target on Big Blue to $175 from $195, implying about 10 percent downside from current levels.

What's IBM stock doing now? (Click here to get the latest quote.)

—By CNBC's Justin Menza. Follow him on Twitter @JustinMenza.

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Disclosures:

IBM is a client of Credit Suisse and the investment bank has provided both investment banking and noninvestment banking services to the company within the past 12 months.

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Disclaimer