In the rapidly evolving world of artificial intelligence (AI), tech giants like Microsoft, Nvidia, and Alphabet have dominated the conversation. However, analysts believe that investors are overlooking the potential of one of the oldest players in the game: International Business Machines Corp (IBM).
Recently, IBM announced that customer demand for AI is "accelerating" and projected better-than-expected free cash flow for the year. The company, known for its software, consulting services, and network infrastructure, also surpassed expectations with its fourth-quarter profit.
While not all analysts share the same optimism, some argue that IBM's improved cash profile is diverting attention from more modest results and inflated AI expectations. Nonetheless, the market reacted positively, driving IBM's stock up by 11.2% to $192.68 on Thursday. This surge marks the largest gain since July 20, 2000, when the stock rose by 13%, and positions it to achieve its highest closing since June 10, 2013, at $195.83.
Bank of America (BofA) analysts, who increased their target price for IBM stock to $200, are impressed by IBM's "defensive portfolio, attractive dividend yield, and underappreciated AI portfolio." Similarly, Evercore ISI analysts published a note titled "Big Blue is Back," expressing similar sentiments and raising their price target to $215 from $200.
According to Evercore ISI analysts, IBM remains an underappreciated AI beneficiary and should continue to experience upward momentum in the coming years.
Over the years, IBM has strategically shifted its focus towards software and cloud offerings to adapt to the increasing online workspace. While the tech industry experienced a revival due to AI-related potential after concerns about a downturn in digital demand during the pandemic, IBM CEO Arvind Krishna believes that business trends this year will mirror those of the previous year.
IBM's AI potential often flies under the radar, but industry analysts and investors are starting to recognize the company's latent strength in this area. As AI continues to drive technological advancements, it would be unwise to overlook IBM's role in shaping the future.
IBM Expects Strong Performance Despite Talk of Budget Cuts
Despite talk of reduced budgets in the tech industry, IBM remains optimistic about its future. The company announced that it anticipates $12 billion in free cash flow this year. Sales have grown across all segments, driven by increased demand for cloud and AI services.
IBM's AI and data platform, WatsonX, along with its generative AI, has shown significant growth. Its book of business has approximately doubled compared to the previous quarter. This indicates a promising long-term trend, as companies increasingly rely on IBM for help with large language models, data preparation, app development, and performance monitoring.
However, not everyone shares the same optimism. UBS analysts have a sell rating on IBM's stock and expressed concerns about potentially weak growth in the coming year. They argue that IBM's portfolio only supports around 2.5% organic growth in 2024, which contradicts the market's perception of IBM as a major AI beneficiary. They also noted soft results in software and consulting during Q4.
UBS analysts are skeptical of the doubling of IBM's book of business for AI, emphasizing that it does not directly translate into near-term revenue. They believe that the $400 million worth of signings associated with the doubling may not contribute significantly to sales, considering IBM's full-year revenue outlook for single-digit growth.
Despite these reservations, IBM remains confident in its strategic focus on AI and digital transformation. The company believes that while customers are becoming more discerning in their spending habits, IBM can offer valuable consulting services to drive software demand. They also anticipate a positive shift in hardware performance by 2025, thanks to a new mainframe.
Ultimately, while some skeptics question IBM's future prospects, the company remains steadfast in its commitment to providing cutting-edge AI solutions and supporting its clients' evolving needs.