IBM stock has seen a significant increase this year, rising by over 17% year-to-date, outperforming the Nasdaq-100. This growth is attributed to the increasing interest in artificial intelligence and potential rebound in IT spending post Covid-19. IBM’s Q4 2023 results were stronger than expected, with revenue rising 4% year-over-year to $17.4 billion and earnings at about $3.87 per share.
While IBM has been developing artificial intelligence technology for decades, AI hasn’t been a major revenue driver for the company. However, with the surge in demand for AI tools such as OpenAI’s ChatGPT chatbot, IBM is looking to capitalize on this trend. The company introduced Watsonx, a platform enabling enterprise clients to train, tune, validate, and deploy customized AI models. Client demand for AI solutions has been accelerating, with IBM’s book of business for Watsonx and generative AI doubling from Q3 to Q4.
IBM’s software sales grew by 5% year-over-year in 2023, driven by higher sales of Red Hat products and Data & AI solutions. Red Hat, acquired in 2019, has been a key growth driver for IBM due to its open-source technology, hybrid cloud platform, and large developer community. In addition, IBM’s consulting business saw a 6% year-over-year increase in sales in 2023, despite a challenging IT spending market. The company plans to decrease costs by $3 billion in 2024 through headcount reduction and automation.
Although IBM has seen strong gains of 50% in the past three years, it has struggled to consistently beat the market. Returns for the stock were 6% in 2021, 5% in 2022, and 16% in 2023, underperforming the S&P 500 in 2021 and 2023. In the current uncertain macroeconomic environment, with high oil prices and elevated interest rates, IBM’s stock trades at 20x consensus 2024 earnings, which is considered elevated compared to historical levels. Growth is expected to remain subdued in the near term, with low double-digit revenue growth projected for 2024 and 2025.
Trefis High Quality Portfolio stocks have outperformed the S&P 500 consistently in recent years, suggesting that IBM may face challenges in outperforming the market in the future. With a valuation of $177 per share, slightly below the current market price, it is important to monitor IBM’s performance in the rapidly evolving technology industry. The company’s focus on cloud computing, AI, and automation presents growth opportunities, but the overall growth trajectory for IBM remains modest for the near future. Investors should pay attention to the evolving market dynamics and IBM’s response to industry trends to assess its potential performance in the coming years.
