International Business Machines (IBM.US) has demonstrated strong momentum in its transformation journey, particularly in AI and software services. The company's stock surged approximately 8% after hours following its Q4 earnings report, with the shares up 24.5% over the past 12 months.
Q4 2024 Earnings Highlights
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Create account Try a demo Download mobile app Download mobile app- Revenue & Profitability:
- Total Revenue: $17.55 billion (+1% year-over-year)
- Adjusted EPS: $3.92 (+1% year-over-year)
- Net Income: $2.92 billion vs. $3.29 billion year-over-year
- Operating Gross Margin: 60.6% (up 50 basis points)
Earnings vs Estimates. Source: Bloomberg
- Segment Performance:
- Software Revenue: $7.92 billion (+10% year-over-year)
- Red Hat Growth: +17%
- Automation: +16%
- Transaction Processing: +11%
- Data & AI and Security: +5% each
- Consulting Revenue: $5.18 billion (-2% year-over-year)
- Infrastructure Revenue: $4.26 billion (-7.6% year-over-year)
- Software Revenue: $7.92 billion (+10% year-over-year)
- Key Financial Metrics:
- Free Cash Flow: $6.16 billion (+1.2% year-over-year)
- Cash Position: $14.8 billion (up $1.3 billion from year-end 2023)
- Total Debt: $55 billion (down $1.6 billion from year-end 2023)
- Financing Debt: $12.1 billion
- Full Year 2024 Performance:
- Total Revenue: $62.8 billion (+1% year-over-year)
- Operating Pre-tax Income: $11.2 billion
- Operating EPS: $10.33
- Free Cash Flow: $12.7 billion (+14% year-over-year)
- 2025 Guidance:
- Revenue Growth: At least 5% at constant currency
- Free Cash Flow Target: $13.5 billion
- Expected FX Impact: -2% headwind to revenue
Strategic Evolution: Software-First Transformation
IBM has successfully pivoted to become a software-centric company, with software now representing approximately 45% of its business. The company's Hybrid Platform & Solutions achieved $15.3 billion in Annual Recurring Revenue (ARR), growing at 11%. Red Hat continues to be a standout performer, with OpenShift reaching $1.4 billion in ARR and growing at approximately 25%. This transformation has significantly improved IBM's margin profile and recurring revenue base.
IBM quarterly earnings presentation. Source: Company
AI Momentum: $5 Billion Milestone
IBM's AI initiatives have gained significant traction, with its generative AI book of business growing to over $5 billion inception-to-date, up nearly $2 billion in just one quarter. The composition reveals an interesting split: approximately 20% comes from software sales while 80% derives from consulting services. This distribution highlights IBM's unique position in both providing AI technology and helping enterprises implement it effectively.
IBM quarterly earnings presentation. Source: Company
DeepSeek Validation: IBM's Small Model Strategy Pays Off
Recent developments with DeepSeek, a Chinese AI company, have validated IBM's long-standing strategy of focusing on smaller, more efficient AI models. While other tech giants saw their stocks tumble following DeepSeek's announcement of efficient AI models, IBM remained relatively stable. The company claims to achieve "30 times' reduction in inference costs" using its approach, positioning it well in the evolving AI landscape.
Open Innovation: The Linux Strategy for AI
IBM has taken a distinctive approach to AI development by embracing open innovation. The company's Granite models, trained on 116 programming languages and released under the Apache 2.0 license, represent a strategic bet on open-source AI development. CEO Arvind Krishna has dubbed this the "Linux of the AI era," drawing parallels to the successful open-source strategy that transformed enterprise computing.
M&A Strategy: New Era of Deal-Making
The political landscape shift is opening new opportunities for IBM's acquisition strategy. CEO Krishna's comments about a "more pro-competition" environment under Trump suggest increased M&A activity ahead. This could accelerate the completion of the pending $6.4 billion HashiCorp acquisition, which has faced regulatory scrutiny in the UK, and potentially lead to more strategic acquisitions in 2025.
Infrastructure Renewal: Z17 Launch
IBM plans to launch its next-generation mainframe, the Z17, in mid-2025. This comes after the success of the Z16, which the company describes as its "most successful program in history." The new mainframe is expected to provide enhanced AI capabilities through the Telum II processor and drive infrastructure segment growth in the second half of 2025.
IBM quarterly earnings presentation. Source: Company
Upcoming Catalyst
IBM will host an Investor Day on February 4th, 2025, where management is expected to provide detailed insights into its AI strategy, growth initiatives, and long-term financial targets. The event could serve as a significant catalyst for the stock, particularly given the recent momentum in AI-related bookings and software performance.
Valuation
Based on our analysis of IBM using historical data and company financials, we've developed projections incorporating various growth scenarios. Our base case DCF model uses the following key assumptions:
Core Operating Assumptions:
- Revenue growth rate: 5% for the initial 5-year period
- Operating margin: 18%
- Tax rate: 10%
- WACC: 7.8%
Terminal Value Assumptions:
- Terminal revenue growth: 3%
- Terminal WACC: 7%
These assumptions reflect IBM's mature business profile while acknowledging its growth potential in cloud services and AI initiatives. The relatively conservative terminal growth rate of 3% balances the company's established market position with ongoing digital transformation opportunities.
The sensitivity analysis reveals that with our base case 18% operating margin and 5% revenue growth, the implied share price would be $266.43, suggesting potential upside from the current price of $228.63. However, if operating margins were to decline to 16% with only 2% revenue growth, the implied value would drop to $197.91.
Looking at the terminal value sensitivity, with our assumed terminal WACC of 7% and terminal revenue growth of 3%, the model continues to support a fair value of $266.43. The sensitivity tables demonstrate that small changes in terminal growth rates or WACC can significantly impact valuation - for instance, a 0.2% change in terminal growth rate could shift the valuation by approximately $10-15 per share.
Source: Bloomberg Finance LP, XTB Research
Source: Bloomberg Finance LP, XTB Research
Looking at the peer comparison analysis with Accenture, Infosys, and Capgemini, IBM currently trades at a P/E of 23.61x and a forward P/E of 20.74x, both below the peer group mean of 25.25x and 22.36x respectively. This suggests IBM trades at a moderate discount to its peers on earnings-based metrics. The company's P/S ratio of 3.36x and forward P/S of 3.27x are also close to the peer group means of 3.22x and 3.01x, indicating relatively fair valuation on sales-based metrics.
The multiple-based valuations present interesting insights across different metrics. Using the mean peer multiples suggests potential upside, with implied valuations ranging from $173.46 (P/FCF) to $268.63 (Forward P/S). The cap-weighted approach, which accounts for company size differences, indicates more substantial upside potential with values ranging from $245.07 (Forward EV/Sales) to $322.22 (P/S).
Source: Bloomberg Finance LP, XTB Research
Recommendations:
IBM has 21 recommendations, with 8 "buy" and highest price of $280, 8 “hold” and 5 “sell” with a price of $139. The 12-month average stock price forecast is $239.71, implying a 4.8% upside potential from the current price.
Technical analysis (Daily interval):
The stock is at an all-time high in premarket trading. For bulls, support will be at the previous high of $239, with additional support at the 50-day SMA at $223. Bears will attempt to retest the zone between the 50-day and 100-day SMAs, which have acted as strong support levels over the past two months. The RSI shows bullish divergence, while the MACD also favors the bulls.
