MORGAN STANLEY: IBM's stock could explode 40% (IBM)

A worker guides the first shipment of an IBM System Z mainframe computer in Poughkeepsie, New York, U.S. March 6, 2015. Picture taken March 6, 2015.  Jon Simon/IBM/Handout via REUTERS  Thomson Reuters

Don't let Berkshire Hathaway's IBM stock selloff scare you, Morgan Stanley says.

The multinational technology company's stock price is primed for a strong second half of the year, according to the US investment bank.

IBM posted weak first quarter gross margins, but Morgan Stanley expects a rebound with IBM due to ship a new mainframe later this year.

According to Morgan Stanley's analysis, the launch of a new mainframe has historically added $400 million in pre-tax income. 

"We see precedent for IBM achieving a back end loaded year," the Morgan Stanley analysts noted, also adding that in the second half, "growth accelerates and margins expand around a mainframe cycle making the recent pullback an attractive entry point heading into 2H17, in our view."

The bank has a price target on IBM of $212, almost 40% above IBM's current $153.47 stock price.

IBM's stock has dropped in recent weeks, down from a high of $182.78. One of the main contributors to that pullback was Berkshire Hathaway's decision to sell 20.5% of its IBM stock.

"While it’s never good to see a long-term, large shareholder reduce its position, the reasons for owning IBM drifted materially in recent years which likely drove the decision to reduce the position when the share price approached the fund's cost basis," the note said. 

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