IBM Earnings Preview: Will AI and Cloud help the company to reach all-time highs?

International Business Machines Corporation (IBM) is set to release its second-quarter earnings on Wednesday, July 24, 2024, after the closing bell. Investors will be closely scrutinizing the company's performance to assess its progress in its strategic transformation and its ability to navigate a challenging market landscape, especially on the AI field. The company has been changing from arther hardware company to become more focused on software, cloud computing and artificial intelligence.

Key Expectations

• Software Services Growth: Analysts anticipate robust growth in this segment, driven by the increasing adoption of generative AI solutions. IBM's focus on AI initiatives, such as its Watson platform, is expected to continue to pay dividends.
• Expectations for revenue growth are rather moderate, and Wall Street consensus points at only 1% growth:
  • Wall Street: $15.62 billion in revenue, EPS 2.19 USD
  • Morgan Stanley: $15.6 billion in revenue, EPS 2.27 USD
  • Bernstein: $15.7 billion in revenue
• Consulting Services: While IBM has made strides in expanding its software and services portfolio, consulting growth is projected to slow down. This is due to a combination of factors, including a challenging economic environment, discretionary spending constraints, and the limited immediate impact of generative AI consulting projects. Growth in this segment will probably decrease significantly due to challenging consulting spending environment.
• HashiCorp Acquisition: The pending acquisition of HashiCorp, a cloud infrastructure automation company, will be a key topic of discussion. Investors will be eager to understand the impact of this deal on IBM's growth prospects and its ability to compete in the cloud market. Expectations:
  • Acquisitions to add about 100 basis points to IBM’s 2024 revenue growth
  • Apptio, webMethods, StreamSets and HashiCorp acquisitions—along with the current mainframe and Enterprise License Agreement (ELA) cycle —meant “potential for growth to reaccelerate in 2025.”

Challenges and Opportunities

IBM has made significant progress in transforming its business towards a more software and services-oriented model. However, the company faces several challenges, including slowing revenue growth, increased competition from cloud-native providers, and the need to successfully integrate acquisitions like HashiCorp. Capitalizing on the potential of generative AI and other emerging technologies will be crucial for IBM's future success. The company's ability to execute flawlessly on its strategy and address these challenges will be key to regaining investor confidence and driving long-term growth.

Overall, IBM's second-quarter earnings report will provide valuable insights into the company's progress in its transformation journey and its ability to navigate a complex and evolving market. Investors will be closely watching the company's performance in software services, consulting, and infrastructure, as well as for updates on the HashiCorp acquisition.

The stock is up more than 30% over the past year and about 12% this year. On the other hand, the stock is about 8% below local high from March and about 17% below all-time high from more than 10 years ago. However, the consensus price from recommendations is about 10-12 USD below current price but latest Goldman Sachs and RBC recommendations indicate a price rather of 200 USD which gives about 9% upside for the company.