Shares of International Business Machines are trading at levels not seen in more than a decade. A key factor behind the recent surge for IBM stock will sound familiar to investors: artificial intelligence.
IBM stock rallied more than 9% Thursday after the company published better-than-expected fourth-quarter earnings and a strong forecast for 2024. Chief Executive Arvind Krishna credited accelerating demand for AI for helping Big Blue's performance.
That's not surprising, of course. IBM has long been associated with AI. The 112-year-old IBM helped bring AI mainstream when its Watson supercomputer beat Jeopardy! champions Ken Jennings and Brad Rutter more than a decade ago.
But Watson faded into the background in the years after that. And when startup OpenAI's ChatGPT had everyone talking about AI again late in 2022, IBM stock appeared to be left out of the party. Excitement over generative artificial intelligence instead sent shares of OpenAI partner Microsoft and chipmaker Nvidia to new heights in 2023. IBM entered its third-quarter earnings in October trading roughly flat for the year.
Since then, however, shares have jumped nearly 40%, capped off by its surge Thursday. That was helped by a broader tech rally, of course. But investors are increasingly recognizing IBM as a potential AI winner.
Still, debate remains on whether the excitement is getting ahead of actual business progress for the Armonk, N.Y.-based company.
What Drove IBM Shares Higher
In its results posted late Wednesday, IBM reported adjusted earnings of $3.87 per share, up 8% year over year. The earnings topped Wall Street consensus. IBM also topped views on revenue, with a 4% increase to $17.4 billion.
On Thursday, shares gained 9.5% to close at 190.43, the company's highest level since June 2013, according to Dow Jones Market Data. On the stock market today, IBM has eased back by a half-percent to 189.48 in morning trades.
For 2024, IBM projected revenue will grow in the mid-single digits while generating $12 billion in free cash flow. Those projections impressed some Wall Street analysts.
On the call with analysts, CEO Krishna said that IBM's book of business for AI and its WatsonX product doubled between the third and fourth quarter earnings reports. That would imply roughly $400 million in bookings, according to analyst estimates.
IBM has focused its business in recent years on growing its hybrid cloud and AI offerings. Chief Financial Officer Jim Kavanaugh told analysts Wednesday that software and consulting now represent 75% of IBM's revenue base, compared to 55% in 2020.
Is IBM Stock An 'Underappreciated AI' Winner?
Additionally, company officials highlighted some of its recent AI work. Spanish football team Sevilla FC is using WatsonX to power Scout Advisor, a tool to help the team identify new players. IBM conducted a "successful pilot" with Citi, Krishna told analysts Wednesday.
Analysts who are bullish on IBM stock believe it can help enterprises make sense of the difficult and expensive process of launching AI tools.
Shortly before IBM's earnings report, Evercore ISI analyst Amit Daryanani upgraded his view on IBM stock to a buy. The "complicated and messy" process of developing AI applications will offer an opportunity to IBM, in his view.
"IBM with their unique set of consulting and software assets can help solve this bottleneck and enable enterprise customers to deploy AI tools on- and off-premise more seamlessly," Daryanani wrote to clients on Jan. 19.
Daryanani raised his 12-month price target for IBM stock to 215 following the fourth-quarter results. In a client note, he called IBM an "underappreciated AI beneficiary."
BofA Securities analyst Wamsi Mohan similarly views IBM as "underappreciated" in the AI category. In a client note Wednesday, BofA reiterated a buy rating and set a price target of 200.
Questions Remain About IBM's AI Potential
Skeptics remain despite IBM stock's recent surge. Among Wall Street analysts, IBM has nine hold, or neutral, ratings compared to seven buy ratings and four sell ratings.
To that point, the company's software sales came in at $7.5 billion, below analyst estimates. Consulting revenues of $5 billion were also below projections.
Citing those numbers, Wedbush analyst Moshe Katri cautioned that IBM's revenue guidance for 2024 is "likely ambitious." Katri is neutral on the stock.
Meanwhile, David Vogt at UBS reiterated a sell rating for IBM stock following the report. He noted that IBM shares are trading at 18-times the company's projected earnings over the next 12 months. That marks a "significant" premium compared to its historical valuation, he wrote.
"We believe the extended valuation reflects the market's perception that IBM is a key beneficiary of AI investments over the long-term," Vogt wrote. "While IBM Consulting is well positioned to participate, IBM's infrastructure assets and software portfolio are unlikely to accelerate, given competitors (hyperscalers) with larger R&D and Capex budgets should be the winners, in our view."
IBM Stock Technical Scores
Krishna told analysts Wednesday that companies are increasingly investing in tech as a way to address broader challenges, such as changing demographics and supply chain issues. That gives the firm confidence this year.
"We see every one of them leaning into technology as a potential answer that helps them against all of those potential headwinds," Krishna said. "And so, we feel pretty good that technology budgets should stay in line with 2023 going into 2024."
The recent run for IBM stock has boosted its technical scores. The company's stock has a strong IBD Composite Rating of 93 out of a best-possible 99, according to IBD Stock Checkup.
Moreover, its Relative Strength Rating checks in at 92 out of a best-possible 99, indicating IBM stock has outperformed 91% of the market over the past 12 months.
