Up 21% In The Last Six Months, Will IBM Stock See Further Gains Post Q4?

Computing behemoth IBM (NYSE:IBM) is slated to report its Q4 2023 results January 24, reporting on a quarter that is likely to have seen IT spending remain lackluster. We estimate that IBM’s revenue will come in at about $17.3 billion for the quarter, roughly in line with the consensus estimates and about 3% ahead of last year. We estimate that earnings will stand at close to $3.76 per share, roughly in line with the consensus. So, what are some of the trends that are likely to drive IBM’s earnings?

We expect IBM’s core software operations to be one of the key drivers of growth for the quarter. Over Q3, software sales grew by 8% year-over-year, driven by higher sales of Red Hat products and Data & AI solutions.  Red Hat, which was acquired in 2019, has been a key growth driver for IBM, given its large portfolio of open-source technology, its hybrid cloud platform, and its large developer community.  IBM’s consulting business has also been doing well, despite a tough market for IT spending. Over Q3 consulting sales rose by 6% year-over-year to $4.96 billion, with IBM noting that it was gaining market share.  Things could remain mixed on the infrastructure front, as demand for IBM’s mainframe computers could be weighed down by weaker investments by big corporations, amid high inflation and a mixed macroeconomic picture.

IBM is one of a handful of stocks that have increased their value in each of the last 3 years, but that still wasn’t enough for it to consistently beat the market. Returns for the stock were 6% in 2021, 5% in 2022, and 15% in 2023.  In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that IBM underperformed the S&P in 2021 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including AAPL, MSFT, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could IBM face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

We think IBM stock is likely to remain roughly flat following Q4 earnings. At the current market price of about $165 per share, IBM stock trades at 16x consensus 2024 earnings. While IBM’s business is increasingly focused on hot areas such as cloud computing, AI, and automation, growth is likely to remain muted in the near-term, with consensus pointing to low double-digit revenue growth for 2024.  We value IBM stock at $151 per share, which is slightly below the current market price.  See our analysis  IBM Valuation: Expensive or Cheap for more details on what’s driving our price estimate for IBM. Also, check out the analysis of IBM Revenue for more details on how IBM revenues are trending.

[1] Returns as of 1/17/2024
[2] Cumulative total returns since the end of 2016

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