/International%20Business%20Machines%20Corp_%20logo%20on%20storage%20rack-by%20Nick%20N%20A%20via%20Shutterstock.jpg)
Shares of International Business Machines (IBM), the technology and consulting giant, have given up some of their recent gains. IBM stock is now down 10% from its 52-week high of $239.35 and is trading in negative territory to start the year. This decline highlights ongoing challenges within IBM’s consulting segment.
The consulting business has encountered headwinds stemming from factors like geopolitical uncertainty, inflation, and rising interest rates. These conditions have led businesses to cut back on discretionary IT spending. As a result, consulting revenues slightly declined during the third quarter of 2024, coming in at the lower end of management’s expectations.
Headwinds Persist for IBM
IBM is currently navigating a challenging macroeconomic environment, with no immediate signs of improvement in client spending behavior. As businesses adjust their IT budgets to focus on generative artificial intelligence (AI) initiatives, IBM’s consulting revenue could remain under pressure. Management has indicated that this trend will likely continue into the fourth quarter, with consulting performance expected to stay in line with Q3.
Adding to the challenges, the strengthening of the U.S. dollar relative to other currencies could create headwinds for the company. Further, the uncertainty around the PC refresh cycle in 2025 is a concern.
What’s Ahead for IBM in 2025?
While the company’s consulting arm is facing challenges, IBM is repositioning its portfolio toward higher-growth, higher-margin businesses such as hybrid cloud and AI. This pivot aligns with growing client demand for advanced technologies that enhance business operations.
Further, the consulting segment’s improved portfolio mix, operating leverage, and productivity initiatives are likely to generate solid margins and free cash flow.
IBM will likely benefit from the acceleration in software revenue. The software segment could see broad-based growth, with key areas such as hybrid cloud, data management, automation, and transaction processing poised to deliver strong results.
In terms of near-term growth, IBM’s revenue under contract has shown impressive momentum, growing in the mid-teens, while annual bookings rose at a double-digit pace in the third quarter. Further, opportunities from generative AI and traction in its virtualization solutions augur well for growth.
In the software business, IBM witnessed solid growth in its recurring revenue base. Further, the momentum will likely sustain led by innovation across its software portfolio. The company’s hybrid platform and solutions annual recurring revenue (ARR) has reached $14.9 billion in Q3, an 11% increase year-over-year, fueled by advancements in AI, automation, data services, and Red Hat’s growing contributions. Further, the transaction processing division saw 9% growth in Q3, reflecting its growing capacity, launch of a new generative AI product, and high renewal rates.
The company continues to launch new products, which will support its growth in 2025. Further, its HashiCorp acquisition will drive significant synergies for IBM. This acquisition will allow it to offer more comprehensive hybrid and multi-cloud solutions to enterprise clients, effectively expanding its addressable market and strengthening its competitive positioning.
The Bottom Line on IBM Stock
While IBM’s consulting segment may continue to face challenges in the short term, the company’s ongoing focus on margin improvement offers an optimistic outlook for the long term. Despite the relatively weak demand environment, IBM appears well-positioned to capitalize on the generative AI market.
Looking forward, generative AI also presents a promising avenue for growth for its consulting arm. IBM is building a portfolio of AI-driven solutions, with $1 billion in new bookings for its AI-related products reported in Q3. The company’s collaborations with clients to develop custom AI architectures further strengthen its position in the AI space.
Further, IBM’s software business momentum is expected to sustain, with revenue growth anticipated to remain strong. This steady growth could be a key driver for the company’s financial performance moving forward.
However, Wall Street analysts maintain a “Hold” consensus rating on IBM stock. This cautious stance stems from the lingering weakness in its consulting business. Additionally, given the stock’s impressive performance over the past year, with shares up nearly 31% over the past 52 weeks, analysts’ average price target reflects limited upside potential in the near term.
