IBM (IBM) Last Update 7/19/22
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% of Stock Price
Revenue
Gross Profits
Free Cash Flow
IBM
STOCK PRICE
DIVISION
% of STOCK PRICE
Software
63.1%
$139
Consulting
15.2%
$33
Net Debt
28.0% $62
TOTAL
100%
$221
$158.74
Yours
Trefis Price
N/A
$134
Market
 
Top Drivers for Period
Key Drivers
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TREFIS Analysis


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RECENT NEWS AND ANALYSIS

Potential upside & downside to trefis price

IBM Company

VALUATION HIGHLIGHTS

  1. Software constitutes 63% of the Trefis price estimate for IBM's stock.
  2. Infrastructure constitutes 21% of the Trefis price estimate for IBM's stock.
  3. Consulting constitutes 15% of the Trefis price estimate for IBM's stock.

WHAT HAS CHANGED?

Latest Earnings

IBM posted a stronger-than-expected set of Q2 2022 results, with revenue growing by 9% year-over-year to $15.5 billion and adjusted earnings per share coming in at $2.31. Growth was driven primarily by the company's consulting and infrastructure business. Consulting sales rose by over 9% to $4.8 billion, while infrastructure sales jumped 19%, led by the launch of the new z16 generation of mainframes earlier in the quarter.

Managed Infrastructure Services Spin-off

In late 2021, IBM completed the separation of its managed infrastructure services unit into a new public company called Kyndryl. The transaction will allow IBM to focus on high-growth and higher-margin areas such as artificial intelligence and cloud services while unlocking some value for IBM shareholders.

KEY DRIVERS

Below are key drivers of IBM's value:

Software

  • IBM Software revenues: We currently forecast the revenues from IBM's software business to rise from $24 billion in 2021 to over $33 billion by 2028. We expect growth to be driven by the Red Hat solution and higher sales of other hybrid cloud and AI offerings. However, if sales rise to over $36.5 billion, there could be a 10% upside to our current price estimate.
  • IBM Software Gross Margin: We expect the software margin to tread around the 79% mark in the long run. However, if margins rise to over 83% in the long-term, there could be a 5% upside to our current price estimate.

Consulting

  • Consulting Margins: We expect IBM's consulting margins to rise from 28% in 2021 to around 29.5% in 2028. However, if margins improve further to about 34% over the same period, there could be a 5% upside to our price estimate for IBM.

For additional details, select a driver above or select a division from the interactive Trefis split for IBM at the top of the page.

BUSINESS SUMMARY

IBM is one of the largest technology companies in the world, focused on providing software, consulting services, and IT infrastructure. IBM primarily caters to large and medium-sized businesses worldwide.

IBM's Software business includes its hybrid cloud platform, which provides AI-driven software that helps customers operate, manage and optimize IT resources and business processes within hybrid, multi-cloud environments. The software business also sells transaction processing software that supports workloads in industries such as banking, airlines, and retail.

IBM's Consulting segment, which employs over 150,000 professionals in more than 150 countries, provides industry expertise in business transformation and technology implementation. IBM's consulting business works with clients to design and build open, hybrid cloud architectures and optimize workflows and business processes.

IBM's Infrastructure division sells IBM Z, the company's mainframe solution, as well as distributed infrastructure solutions such as the IBM Cloud Infrastructure-as-a-Service (IaaS) offering.

SOURCES OF VALUE

We believe that IBM's Software division is its most valuable segment for a couple of reasons.

Recurring Revenues

An increasing mix of IBM's software business is based on software as a service. These services are recurring in nature as a client tends to re-sign with an existing service provider. As a result, contracts and services are renewed on expiry. We believe IBM would be able to maintain steady cash flows, even in tough times, in a segment where it is the market leader.

Focus on high margin and high-growth areas

IBM Software business is increasingly focused on the cloud and AI, which are fast-growing segments of the technology market. Margins for these software products are also likely to be higher, translating into a higher contribution to IBM's longer-term profit and cash flows.