Here's How High Analysts Think Outperforming IBM Stock Can Rise

Barchart · 10/18 07:10

Legacy tech giant International Business Machines (IBM) has broken out as a surprise outperformer in 2024, with the shares up 42% on a year-to-date basis - easily surpassing the 22.5% returns of the broader S&P 500 Index ($SPX).

The tech stock hit an all-time high of $237.37 earlier this week, driven to new heights by its pivot to artificial intelligence (AI), which is producing substantial revenue growth for the company.

However, analysts are still largely lukewarm on the stock, at best. As IBM continues to surpass most of Wall Street's expectations, how much higher can this surprise outperformer rise? Here's a closer look.

About IBM Stock

Founded in 1911, International Business Machines Corporation (IBM) is a familiar name in the information technology (IT) sector. With a market cap of $213.9 billion, IBM boasts a significant global presence, operating in over 170 countries worldwide. The company offers a wide range of software and hardware solutions, now enhanced by advanced technologies such as AI and cloud computing. These integrations are helping IBM to transform operational processes across various industries.

IBM has strategically positioned itself to secure long-term stability and robust sales by focusing on enterprise-class corporate customers with extended contracts. These long-term contracts allow IBM to maintain a consistent revenue stream, which is particularly beneficial in navigating the fluctuating demands of the tech industry. The company leverages these contracts to deepen client relationships, providing comprehensive tech solutions and services that support the evolving needs of large-scale businesses.

For instance, the Watsonx generative AI platform has only been around for one year, but already has more than $2 billion in signed contracts.

Inside IBM's Financials

IBM’s strategic shift toward higher-value segments like hybrid cloud and artificial intelligence has required a realignment of its business model. This transition requires substantial investment and time before yielding returns, which has contributed to a short-term slowdown in growth.

However, IBM's Q2 result exceeded analysts' expectations, as strength in AI more than offset softness in the consulting segment. IBM generated more than $4.5 billion in free cash flow (FCF) through the first half of 2024, and hiked its full-year FCF forecast, with management now expecting the total to surpass $12 billion.

Looking ahead, IBM is set to report its Q3 earnings next week, with results expected after the close on Wednesday, Oct. 23. Analysts are expecting earnings per share (EPS) of $2.26, up 2.7% year over year, on revenue of $15.06 billion. Notably, IBM has surpassed Wall Street's bottom-line estimates in each of the last four quarters.

What Do Analysts Say About IBM Stock?

The analyst community remains largely unimpressed by IBM's outperformance this year, although the stock has earned a few relatively upbeat notes lately.

Matthew Swanson of RBC Capital Markets is one of the few bulls in Big Blue's corner, and recently backed his “outperform” rating while raising his price target from $211 to $250 - the highest on the Street. In a note, the analyst said he expects another quarter of robust FCF from IBM, with expectations for a stronger second half from the company's software segment.

Separately, Stifel earlier this week deemed IBM a “buy,” and upped the stock's price target to $246 from $205.

“Mainframe cycles typically last ~10-12 quarters, and we expect the next cycle to begin in 1H25,” wrote the firm in a note to clients, adding that "historically, mainframe cycles add ~$1.5B to segment revenue (Infrastructure) in the first 12 months."

Overall, however, Wall Street doesn't have particularly lofty expectations for IBM stock. The consensus opinion among 16 analysts in coverage is a “hold” rating, and IBM has already outpaced its mean price target of $207.12.

The Bottom Line on IBM Stock

Despite IBM stock soaring to an all-time high, it still trades at a reasonable 22.9x forward earnings and 15.48x forward cash flow, which is a discount to the tech sector median on both fronts. That suggests the shares are reasonably priced at current levels.

Additionally, for income-seeking investors, IBM offers an attractive yield of 2.87%, based on its quarterly dividend payment of $1.67. With nearly a quarter-century of consistent dividend growth, IBM is on the cusp of achieving Dividend Aristocrat status, making the stock a solid choice for investors in search of dependable yield.

Combined with IBM's strategic focus on hybrid cloud and AI, alongside its investments in quantum computing, the company looks well-positioned to deliver growth and value over the long haul.

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On the date of publication, Nauman Khan did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.