On Wednesday, BofA Securities maintained a Buy rating on IBM (NYSE:IBM) and increased the price target to $250 from the previous $209. The firm anticipates IBM's third-quarter earnings report, which is scheduled to be released after the market closes on October 23.
IBM shares have experienced a significant rise, increasing by 40% year-to-date, outperforming the S&P 500's 20% gain. The uptick is attributed to expectations of enhanced software growth, including positive trends in transaction processing and contributions from Red Hat, as well as potential benefits from the new Mainframe cycle expected in 2025.
The analyst from BofA Securities highlighted the potential of General AI, which has already generated a $2 billion book of business. This segment is seen as a considerable opportunity for IBM, especially in consulting, which constitutes about 75% of the related business, and software, making up roughly 25%. However, the company is facing some challenges, such as a weaker consulting environment due to a reduction in discretionary projects and a generally soft macroeconomic landscape.
For the third quarter, BofA Securities' projections align with the consensus estimates on Wall Street, forecasting revenues and earnings per share (EPS) of $14.9 billion and $2.22 respectively, compared to the Street's $15 billion and $2.21. Expectations for the fourth quarter are slightly less optimistic than the consensus, with revenue and EPS estimates at $17.79 billion and $3.66 against the Street's $17.83 billion and $3.73.
The analyst expects IBM to confirm its guidance for the fiscal year 2024, reinforcing the Buy rating. The recommendation reflects confidence in IBM's ongoing turnaround, which is expected to improve revenue and free cash flow. Additionally, IBM's defensive portfolio and attractive dividend are also factors contributing to the positive outlook on the stock.
In other recent news, IBM has reported significant advancements in quantum computing with the installation of its advanced processor, the IBM Quantum (NASDAQ:QMCO) Heron. This upgrade has resulted in significant performance enhancements.
In addition, IBM has been recognized by analysts, with Evercore ISI maintaining an Outperform rating, citing potential stabilization in the consulting market. Bernstein SocGen Group and Goldman Sachs also maintained their Market Perform and Conviction Buy ratings respectively, indicating confidence in the company's growth prospects.
IBM has been active in strategic collaborations, notably with NASA and Oak Ridge National Laboratory to launch a new open-source AI model for climate forecasting. The company also inaugurated three new joint Experience Zones with Microsoft (NASDAQ:MSFT), aimed at leveraging generative AI and hybrid cloud technologies.
IBM's recent acquisitions of Kubecost and Accelalpha are expected to expand its hybrid cloud cost management capabilities and enhance its Oracle (NYSE:ORCL) consulting capabilities respectively.
InvestingPro Insights
Recent data from InvestingPro adds depth to BofA Securities' bullish stance on IBM. The company's market cap stands at an impressive $210.59 billion, reflecting its significant presence in the IT Services industry. IBM's P/E ratio of 25.12 suggests investors are willing to pay a premium for its shares, possibly due to its strong performance and future potential.
InvestingPro Tips highlight IBM's financial stability and growth. The company has raised its dividend for 28 consecutive years, demonstrating a commitment to shareholder returns that aligns with the analyst's positive view on IBM's attractive dividend. Additionally, IBM's stock is trading near its 52-week high, with a robust 67.16% total return over the past year, supporting BofA's observation of IBM's outperformance compared to the S&P 500.
The company's revenue growth of 3.04% in the last twelve months, while modest, indicates steady progress in IBM's turnaround efforts mentioned by the analyst. With a gross profit margin of 56.09% and an operating income margin of 16.03%, IBM shows strong profitability metrics that could contribute to the improved free cash flow expected by BofA.
For investors seeking more comprehensive analysis, InvestingPro offers 11 additional tips on IBM, providing a deeper understanding of the company's financial health and market position.
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