VALUATION HIGHLIGHTS
- Software constitutes 65% of the Trefis price estimate for IBM's stock.
- Consulting constitutes 18% of the Trefis price estimate for IBM's stock.
- Infrastructure constitutes 17% of the Trefis price estimate for IBM's stock.
WHAT HAS CHANGED?
IBM Stock Performance In Recent Years
IBM is one of a handful of stocks that have increased their value in each of the last four years, but that still wasn't enough for it to consistently beat the market. Returns for the stock were 16% in 2021, 11% in 2022, 22% in 2023, and 39% in 2024.
In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, 24% in 2023, and 23% in 2024 — indicating that IBM underperformed the S&P in 2021 and 2023.
Latest Earnings
Exceeding expectations, IBM announced its Q4 2024 results, showcasing a 1% year-over-year increase in revenue to $17.6 billion and earnings per share of $3.92. The software business also performed strongly, with revenue reaching $7.92 billion, a 10% rise compared to the previous year. Furthermore, the company reported significant growth in its generative AI business, with the total contract value surpassing $5 billion, a notable increase from the approximately $3 billion reported in Q3.
Managed Infrastructure Services Spin-off
In the latter part of 2021, IBM finalized the separation of its managed infrastructure services division, establishing it as a new publicly traded entity named Kyndryl. This strategic move enables IBM to concentrate on high-potential, higher-profitability sectors like artificial intelligence and cloud services, while also generating value for its shareholders.
KEY DRIVERS
Below are key drivers of IBM's value:
Software
- IBM Software revenues: We currently forecast the revenues from IBM's software business to rise from $27 billion in 2024 to over $40 billion by 2031. We expect growth to be driven by the Red Hat solution and higher sales of other hybrid cloud and AI offerings. However, if sales rise to over $45 billion, our current price estimate could be a 10% upside.
For additional details, select a driver above or a division from the interactive Trefis split for IBM at the top of the page.
BUSINESS SUMMARY
A global leader in technology, IBM provides a range of software, consulting services, and IT infrastructure solutions, primarily serving large and medium-sized businesses worldwide.
Its Software division centers around a hybrid cloud platform, offering AI-powered software for managing and optimizing IT and business processes across hybrid and multi-cloud environments. This segment also includes transaction processing software for industries like banking, airlines, and retail.
IBM's Consulting segment, with over 150,000 professionals in more than 150 countries, offers industry expertise in business transformation and technology implementation, helping clients design hybrid cloud architectures and optimize workflows. Finally,
IBM's Infrastructure division markets its mainframe solution, IBM Z, along with distributed infrastructure options such as IBM Cloud Infrastructure-as-a-Service (IaaS).
SOURCES OF VALUE
We believe that IBM's Software division is its most valuable segment for a couple of reasons.
Recurring Revenues
IBM's software business is increasingly relying on a Software as a Service (SaaS) model. This shift leads to a recurring revenue stream, as clients typically renew their subscriptions with existing providers. Consequently, contracts and services are regularly renewed upon their expiry. This predictable revenue base positions IBM, a market leader in this area, to maintain stable cash flows, even during challenging economic periods.
Focus on high-margin and high-growth areas
IBM's Software business is strategically shifting its focus towards the rapidly expanding markets of cloud and artificial intelligence. These areas are also expected to yield higher profit margins for their software products, which in turn should significantly enhance IBM's long-term profitability and cash flow generation.
