By On October 24, Morgan Stanley reiterated its ‘Equal-weight’ rating on IBM but revised the price target downward to $208 from $217.
This adjustment reflects concerns over the company’s mixed third-quarter performance, where the revenue of $14.97 billion came in below their $15 billion estimate, primarily due to weak Consulting and Infrastructure segments.
Consulting revenues remained flat at $5.15 billion, while the Infrastructure segment saw a sharp decline of 7%, which Morgan Stanley attributed to cyclical challenges that may persist into 2025.
Despite the revenue miss, gross margins improved significantly, reaching 57.5% compared to the estimated 56.4%, buoyed by a positive shift toward software sales.
IBM’s stock, which had hit a record high of $235.26 on October 14, fell 6.4% in Thursday’s trading, highlighting the market’s sensitivity to mixed results at these elevated levels.
Q3 Earnings: strong software growth offset by other segments
IBM’s third-quarter earnings for the period ended September 30 showed a 1% year-over-year increase in revenue, reaching $15 billion.
This growth was driven primarily by its Software segment, which posted a 9.7% year-over-year increase to $6.5 billion, surpassing expectations. The segment now constitutes nearly 45% of IBM’s total revenue.
However, the company’s other key segments faced challenges, with Consulting revenue flat at $5.15 billion and Infrastructure down by 7% to $3.04 billion.
IBM’s adjusted earnings per share of $2.30 surpassed market estimates of $2.23, showcasing a strong operating performance amid the revenue shortfall.
CEO Arvind Krishna maintained optimism, stating that Q4 revenue growth would be similar to Q3 levels, with ongoing strength in Software and stable Consulting demand.
New developments in AI and Data security
IBM recently introduced the IBM Guardium Data Security Center, a product that integrates generative AI capabilities to streamline risk assessment and monitoring workflows.
This launch is part of IBM’s broader initiative to leverage AI across its business, complementing the Granite 3.0 models unveiled earlier this month.
Granite 3.0, designed for enterprise AI tasks, is expected to enhance IBM’s hybrid cloud offerings by providing more efficient generative AI and data governance capabilities.
These strategic advancements underscore IBM’s ongoing commitment to expanding its enterprise AI portfolio, which has already grown to a $3 billion book of business.
IBM’s acquisition strategy remains a key growth driver.
The company is set to finalize its $6.4 billion acquisition of HashiCorp by Q4 2024 or early 2025, further expanding its Software segment.
Notably, Stifel analysts expect these acquisitions to boost IBM’s software revenue by over 4% in 2025.
Additionally, IBM’s mainframe business, which typically follows a 10-12 quarter cycle, is projected to witness renewed growth with the launch of its next mainframe series in the first half of 2025.
IBM’s last mainframe cycle (launched in Q2 2022) generated roughly $1.5 billion in segment revenue over the initial 12 months.
Assessing IBM’s valuation
At current levels, IBM trades at a forward P/E ratio of 22.8x, considerably above its five-year average of 14.4x.
This premium valuation is partly due to heightened investor interest in AI-driven growth potential, as evidenced by the stock’s 34.3% gain year-to-date.
However, some analysts question whether IBM’s current multiples are justified, given the slow growth in its Consulting and Infrastructure segments and modest EPS growth projections of around 5.5% annually through 2026.
Furthermore, despite a 2.9% dividend yield, IBM’s limited dividend growth and share buybacks suggest diminishing returns at its current valuation.
IBM’s third-quarter results and strategic developments highlight both the opportunities and the challenges that lie ahead.
With its software segment showing resilience amid broader concerns, and the company pushing forward with AI advancements and acquisitions, there’s a lot for investors to weigh.
Given the current market dynamics, examining IBM’s price action and key technical levels can offer valuable insights into what lies ahead for the stock.
Is the bull run over?
While IBM’s stock has seen a tremendous bull run over the past year, after today’s move it seems it has hit a wall.
Source: TradingView
Before the Q3 result announcement, the stock was trading around $234 for a few days, but wasn’t able to breach the $240 mark.
Hence, investors who have a bullish outlook, but haven’t bought the stock yet, must initiate fresh long positions only if the stock gives a daily closing above $242.
Traders with a bearish outlook can take advantage of this short-term weakness by shorting the stock closer to $220 with a stop loss at $240.2.
If this short-term weakness leads to a reversal in momentum, the stock will fall to its nearest support near $191.8, where one can book profits.
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