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While investors are still getting used to the artificial intelligence (AI) era, the market is intrigued by the next technological evolution, quantum computing. Many emerging pure-play quantum computing stocks, including D-Wave Quantum (QBTS), IonQ (IONQ), and Rigetti Computing (RGTI) are attracting a lot of attention, but they are still volatile investments. However, International Business Machines (IBM), also known as IBM, could be a safer bet for investing in this evolving industry.
With a market capitalization of $241.6 billion, IBM has been a driving force in technological innovation for over a century. IBM has constantly evolved in response to technological advancements and changing market demands. Jim Cramer, host of CNBC’s Mad Money, believes that CEO Arvind Krishna “has reinvented the company.”
The company recently reported strong fourth-quarter results, with its stock up nearly 20% so far this year, outperforming the Dow Jones Industrial Average Index ($DOWI) and the broader market. Let’s find out if this old tech giant is a worthwhile AI and quantum computing investment.
IBM’s Growth Has Been Steady
The AI landscape is rapidly evolving, with competitors such as Microsoft (MSFT), Meta (META), and Nvidia (NVDA) investing heavily in large-scale AI models. These tech giants are experiencing hypergrowth. Conversely, for IBM, while growth hasn’t been explosive, it has been steady. Under the leadership of CEO Arvind Krishna, IBM’s strategic pivot toward AI and hybrid cloud computing has yielded positive results.
In the recent fourth quarter, IBM reported revenue of $17.6 billion, marking a 1% year-over-year increase. Adjusted earnings per share (EPS) of $3.92 also increased 1% year-over-year. Both revenue and earnings surpassed consensus estimates. More robust 10% growth in the software segment driven by heightened demand for AI solutions led to this performance. Its acquisition of Red Hat for $34 billion in 2019 has been instrumental in strengthening the company’s hybrid cloud capabilities, allowing clients to manage workloads across various environments seamlessly. Revenue from Red Hat grew 16% in the quarter. Furthermore, the company’s GenAI book of business has grown to over $5 billion since its inception.
Negatively, the consulting segment declined by 2% while infrastructure revenue decreased by 8% in the quarter.
Despite these challenges, IBM’s focus on AI and cloud computing has bolstered investor confidence. For the full year 2024, revenue grew 1% while adjusted earnings rose 7%. In 2024, it generated $12.7 billion in free cash flow and distributed $6 billion in dividends. It expects to generate $13.5 billion in free cash flow in 2025, which will support its strategic growth plans while maintaining its dividend policy. IBM earned the title of Dividend Aristocrat after paying and increasing dividends for 29 years. It has a forward yield of 2.5%, which exceeds the tech sector average of 1.4%.
Looking ahead, management anticipates revenue growth of at least 5% in 2025, up from the consensus estimate of 3.6%. Furthermore, analysts expect IBM’s earnings to rise by 3.8% in 2025, followed by another 6.4% in 2026.
A Clear Quantum Computing Roadmap
IBM is rapidly expanding its quantum computing division through technological advancements, industry partnerships, and commercialization efforts. The company has a clear roadmap for scaling up its quantum processors. Between 2020 and 2023, the company concentrated on single-chip scaling, improving its quantum processors through a series of ground-breaking developments. These efforts resulted in the IBM Quantum Falcon, Hummingbird, Eagle, Osprey, and Condor chips, which all represent incremental improvements in qubit count and system performance.
IBM has successfully released its Heron chip capable of running 5,000 quantum gates, showing significant improvements in stability and operational power. The company plans to explore the “full power of quantum-centric supercomputing by 2033.” Furthermore, its open-source quantum software, Qiskit, is widely used by researchers and developers to build quantum applications.
As of 2024, the IBM Quantum Network includes over 250 organizations, including Fortune 500 companies, startups, and research institutions. Management stated during the fourth quarter that about 75 quantum systems have been deployed worldwide, revealing their commitment to this emerging technology.
While still in its early stages, IBM’s quantum computing roadmap, cloud integration, and industry partnerships have the potential to help the company thrive in the quantum computing race.
What Does Wall Street Say About IBM Stock?
Overall, IBM stock is a “Moderate Buy” on Wall Street. Of the 18 analysts covering the stock, six rate it a “Strong Buy,” one says it is a “Moderate Buy,” nine rate it a “Hold,” and two suggest it is a “Strong Sell.” The stock is trading above its average analyst target price of $250.98. However, its high price estimate of $320 implies upside potential of 22.2% over the next 12 months.
The Bottom Line on IBM Stock
Investors with a high-risk, high-reward investment strategy may find growing pure-play quantum companies more appealing. However, for risk-averse investors, IBM is a more stable, diversified investment that provides exposure to AI and quantum computing while avoiding the high risk associated with pure-play quantum startups. As of this writing, IBM stock is trading at $263.56 per share, with a forward price-earnings (P/E) ratio of 22.9x.
While IBM's long-term prospects in AI and quantum computing appear promising, the stock appears to be overvalued at the moment. Long-term investors, particularly those seeking a safety margin, may want to wait for a better entry point, such as between $200 and $202.
