Up 14% This Year, Will IBM’s Gains Continue Following Q1 Results?

Computing behemoth IBM (NYSE:IBM) is slated to report its Q1 2024 results on April 24, reporting on a quarter that is likely to have seen the company post moderate growth as global IT spending picks up. 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? See our analysis on IBM Earnings Preview for a closer look at what to expect when IBM publishes earnings.

We expect IBM’s core software operations to remain a key driver of growth for the quarter. Over Q4, software sales grew by 5% year-over-year, driven by higher sales of  Data & AI solutions and Red Hat products. We expect the trend to continue over Q1 as well. IBM has been looking to capitalize on the rising demand for artificial intelligence 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.  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 Q4 consulting sales rose by 6% year-over-year to $5 billion, with IBM continuing to gain market share.

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 $185 now, vs. an increase of about 35% 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 $186 per share, IBM stock trades at close to 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 4/11/2024
[2] Cumulative total returns since the end of 2016

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