In a research note to investors, UBS analyst John Roy upgraded IBM (IBM) to Buy as he believes Artificial Intelligence potential and low public cloud exposure should pay off and outweigh mainframe headwinds.

BUY IBM: UBS' Roy upgraded IBM to Buy from Neutral and raised his price target on the shares to $180 from $160, as his analysis suggests the market is pricing a 2% revenue decline, which he thinks IBM can beat. Additionally, the analyst pointed out that his sum-of-the-parts analysis suggests the market is applying virtually no value to IBM's hardware business, which he believes is "unrealistic." Roy sees a number of additional positives, including operating margin improving 130bps from better Services; the Watson "hype cycle" bottoming this year; a 4.4% dividend providing a floor; limited public cloud exposure at 10%; and the stock being under-owned as one of the 10 most underweight stocks globally. While he acknowledged that foreign exchange rates will likely be a headwind in 2019 and the mainframe cycle will make comps difficult, the analyst argued that these are priced in and investors "will eventually be rewarded."

SURVEY SAYS: UBS' Roy told investors that his survey of 203 global IT decision makers suggests the spending outlook for IT services is flat year over year, but IBM services demand is strong. UBS Evidence Lab surveyed 150 technology executives and found that 100% of U.S. enterprises surveyed have AI projects underway, he noted, adding that his firm also studied Cloud pricing and found surprising strength, indicating better demand. Further, the analyst pointed out that a UBS Evidence Lab Transcriptlytics analysis also showed IBM's tone on earnings calls has turned more positive in the last year, but Glassdoor analysis shows room for improvement.

PRICE ACTION: In morning trading, shares of IBM have gained 1.75% to $151.52.