Up 17% This Year, Why Is IBM Stock Outperforming?

Computing behemoth IBM (NYSE:IBM) stock has fared well this year, rising by over 17% year-to-date, outperforming the Nasdaq-100 which remains up by 10% over the same period. IBM is benefiting from surging interest in artificial intelligence and a potential rebound in IT spending over 2024 after some weakness following the Covid-19 pandemic.  IBM’s Q4 2023 results were also stronger than expected. Revenue rose 4% year-over-year to $17.4 billion, while earnings stood at about $3.87 per share.

IBM has been developing artificial intelligence technology for decades now. While the company’s products have been in the spotlight in the past, including when its supercomputer Watson defeated Jeopardy champion Ken Jennings over a decade ago, AI hasn’t really been a big revenue driver for the company. However, this looks set to change, following the surge in interest in generative AI tools following the success of OpenAI’s ChatGPT chatbot. IBM has been looking to capitalize on the rising demand for AI in the enterprise space. Last year, it introduced Watsonx, its core platform that enables enterprise clients to train, tune, validate, and deploy customized AI models for their businesses. IBM has said that client demand for AI solutions has been accelerating, with its book of business for Watsonx and generative AI roughly doubling from Q3 to Q4.

IBM’s other software products are also gaining traction. Over 2023, software sales grew by 5% 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 2023 consulting sales rose by 6% year-over-year in constant currency terms, with IBM gaining market share. IBM has also been focused on cutting costs, indicating that it would reduce costs in 2024 by $3 billion, up from an estimate of $2 billion previously via headcount reduction and greater automation.

Looking at a slightly longer period, IBM stock has seen extremely strong gains of 50% from levels of $125 in early January 2021 to around $190 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. 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 16% 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 MSFT, AAPL, and NVDA, and even for the mega-cap 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?

At the current market price of about $191 per share, IBM stock trades at 20x consensus 2024 earnings, which is elevated, compared to historical levels. 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 the consensus pointing to low double-digit revenue growth for 2024 and 2025.  We value IBM stock at $177 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 3/31/2024
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios
See all Trefis Price Estimates