IBM Stock is at a Multi-Year High, Can its AI Business Push it Higher?
Since the December coverage of the legacy pioneer of mainframe computing, IBM’s stock (NYSE: IBM) went from $162 to $167 per share. This suggests that IBM is still in a relatively muted rally stage, having been perceived by the market as a slow-to-adapt legacy company.
Microsoft took the mantle that IBM was expected to pursue across key tech forefronts: cloud computing, software productivity suits, and AI. IBM has cutting-edge experience in all three but with a greater focus on development than commercialization rollouts.
However, this market perception of IBM is slowly shifting. Over the last three months, IBM stock gained 20% value, reaching the highest price point since March 2017. In the three months, IBM outpaced MSFT at 20% vs. 16%, respectively, although Microsoft has 4x greater gains on a one-year scale.
Will 2024 be the year when IBM finally joins the Nvidia/Microsoft AI party?
IBM’s Accelerated Positioning in AI
In the last few years, IBM has completed multiple AI-focused acquisitions. In July 2022, Databand.ai became a part of IBM’s ecosystem, geared towards observing data pipelines for errors and poor quality. The latter is estimated to cost organizations $12.9 million annually.
Since 2020, under the supervision of Arvind Krishna, IBM has absorbed 25 companies to boost its hybrid cloud approach and AI tools. In October 2023, the company acquired Manta Software to manage data flows and dependencies.
Manta integrates into IBM’s Watsonx ecosystem of generative AI and AI model deployment. In particular, when developers create AI models, Manta will provide data providence and discrepancies so that all AI training has auditable footprints.
Following this line of acquisitions, IBM launched a $500 million AI venture fund in November. The fund will further integrate generative AI startups and research into Watsonx. In early December, IBM partnered with Meta Platforms to co-launch AI Alliance across academia, finance, and government.
IBM AI Earnings Model Moving Forward
On January 24th, IBM will deliver its Q4 2023 earnings report. In the prior Q3 quarter, the company outlined its approach to delivering AI services, from AI assistants and development tools to the hybrid cloud powering them.
For the quarter, IBM generated $14.8 billion in revenue, of which half came from recurring revenue streams from software solutions. This represents a 3.5% year-over-year growth, with an extra $1 billion cash flow heading into further acquisitions and R&D.
Of the three core IBM divisions (software, consulting, infrastructure), software brought in the largest pie of $6.3 billion, resulting in 6% revenue growth. IBM’s hybrid computing platform tracked the largest uptick of 7% YoY growth, with automation within the category picked up by 13%.
Overall, IBM’s earnings per share of $2.20 represents a 22% growth from a year-ago quarter.
For the full fiscal year, IBM expects up to 5% revenue growth with a free cash flow of ~$10.5 billion, which is $1 billion YoY more. This important metric tells investors that IBM has ample room to reinvest while paying debt obligations and dividends to shareholders.
IBM Stock Forecast
In Q3, IBM repurchased $98 million worth of shares. For the past five years, IBM quarterly repurchased a minimum of 14 million and a maximum of 981 million shares, bringing the quarterly average buyback pressure to an average of 157.84 million shares.
IBM’s dividend yield to shareholders is 3.98%, delivering an annual payout of $6.64 per share. Microsoft has a dividend yield of 0.77% at a $3 per share annual payout. Based on 13 analyst inputs pulled by Nasdaq, IBM stock is a “buy.”
The average IBM price target is $157.7 vs the current $167. The high estimate is $180, while the low forecast is $120.
Do you think the market’s view of IBM will shift drastically during the year as a cheaper stock and helped by expected rate cuts? Let us know in the comments below.
Disclaimer: The author does not hold or have a position in any securities discussed in the article.
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