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 16% of the Trefis price estimate for IBM's stock.

WHAT HAS CHANGED?

Latest Earnings

IBM's Q4 2023 results came in better than expected with revenue rising 4% year-over-year to $17.4 billion and earnings standing at about $3.87 per share. While the software business grew by 3% year-over-year, consulting sales rose by 6% year-over-year despite a challenging market.

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 $26 billion in 2022 to over $33 billion by 2029. 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 $37 billion, our current price estimate could be a 10% upside.

• 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 stand at about 27% levels by the end of our review period. However, if margins improve further to about 30% over the same period, there could be a 5% upside to our price estimate for IBM.

For additional details, select a driver above or 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 the 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 employs over 150,000 professionals in more than 150 countries and 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 technology market segments. 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.