Computing behemoth IBM (NYSE:IBM) has seen its stock gain close to 10% over the last month. There are a couple of factors driving IBM higher. Firstly, Q3 results were pretty strong. Revenue rose 5% year-over-year to $14.8 billion and earnings came in at about $2.20 per share, marginally ahead of estimates. While the software business grew by 8% year-over-year, the consulting business also fared better than expected. Consulting sales rose by 6% year-over-year to $4.96 billion despite a challenging market with IBM noting that it was gaining market share. The infrastructure business saw sales fall modestly, as demand for IBM’s mainframe computers such as the z16 series, introduced last year, declined as companies have been cutting back on IT spending amid high inflation and a mixed macroeconomic picture. That said, IBM’s numbers were a bit better than expected.
Separately, the big interest in artificial intelligence this year, following the rollout of ChatGPT is also apparently helping Big Blue. IBM is seen as a veteran of sorts in the AI space, having worked on the technology over the last few decades. In the current generative AI context, IBM is looking to create a more differentiated approach. Unlike big tech titans such as Google and Microsoft, which focus on more generic large models geared towards the public, IBM is looking to help customers create specifically tailored AI applications that enable them to maximize the value of their data with its Watson X offering Over Q3, IBM said that customers were adopting its Watson X platform at an increasing pace, noting that bookings over the quarter for these AI products came in in the “low hundreds of millions of dollars.” This could potentially translate into a run rate approaching $1 billion per year. IBM also announced earlier this week that it was launching a $500 million venture fund that would invest in artificial intelligence companies, focused on generative AI technology.
IBM stock has shown strong gains of 25% from levels of $125 in early January 2021 to around $155 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period. IBM is one of a handful of stocks that have increased their value in each of the last 3 years, but that still wasn’t enough for it to consistently beat the market. Returns for the stock were 6% in 2021, 5% in 2022, and 8% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 18% in 2023 (YTD) – indicating that IBM underperformed the S&P in 2021 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including AAPL, MSFT, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could IBM face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?
At the current market price of about $153 per share, IBM stock trades at 16x consensus 2023 earnings. Although IBM’s growth rates have been lackluster, we think this is a fair valuation, given that IBM is focusing on core areas such as cloud computing, AI, and automation after divesting its legacy business. IBM is also making mid-size acquisitions to bolster its portfolio of higher-margin software products. For example, it recently acquired Apptio, which enables organizations to track, analyze, and optimize their technology spending. The tool is primarily focused on managing costs related to IT services and resources in hybrid cloud environments. We value IBM stock at $151 per share, which is roughly in line with the current market price. See our analysis IBM Valuation: Expensive or Cheap for more details on what’s driving our price estimate for IBM. Also, check out the analysis of IBM Revenue for more details on how IBM revenues are trending.
|S&P 500 Return||7%||17%||101%|
|Trefis Reinforced Value Portfolio||7%||26%||550%|
 Month-to-date and year-to-date as of 11/16/2023
 Cumulative total returns since the end of 2016