IBM stock price target raised to $244 from $233 at JPMorgan

On Thursday, JPMorgan analyst Brian Essex adjusted the price target for IBM (NYSE:IBM) shares to $244, up from the previous $233, while maintaining a Neutral rating on the stock. Currently trading at $228.63, IBM shares are near their 52-week high of $239.35, reflecting strong market confidence. The adjustment follows IBM’s strong performance in several key areas, including a significant acceleration in software growth and a robust free cash flow (FCF) for the fourth quarter that surpassed expectations. According to InvestingPro analysis, IBM currently appears overvalued based on its Fair Value calculations.

IBM’s software segment experienced a substantial increase, reaching double-digit growth levels, bolstered by a 17% year-over-year (y/y) growth in constant currency (CC) for Red Hat and an 11% y/y growth in Transaction (JO:TCPJ) Processing. This surge in software revenue led to it comprising 45% of IBM’s total quarterly revenue. With overall revenue reaching $62.58 billion in the last twelve months and an impressive InvestingPro Financial Health Score of 2.81 (rated as GOOD), IBM continues to demonstrate strong market positioning. Additionally, IBM’s GenAI business has expanded to represent $5 billion in revenue since its inception.

Despite a slight decline in consulting revenue, down 1.1% y/y in CC terms, IBM saw positive signs in deal momentum, with signings and bookings up 23% y/y and 8% y/y, respectively. The book-to-bill ratio stood at 1.21 times, suggesting potential for consulting revenue to pick up pace and reach low-single-digit levels by FY25.

IBM’s FCF for the quarter was notably higher than anticipated, culminating in a total of $12.7 billion for FY24. The company’s initial guidance for FY25 indicates a 5% y/y revenue growth in constant currency. However, this is offset by a predicted 2% y/y foreign exchange headwind, resulting in a 3% y/y reported consolidated revenue growth. The revenue outlook also includes an approximate 1% contribution from HashiCorp (NASDAQ:HCP), hinting at a lower organic reported growth for the year than initially expected.

Management’s commentary highlighted that portfolio mix enhancements and productivity improvements are expected to contribute to over a 50 basis point increase in pre-tax income (PTI) margin for 2025. This is anticipated to lead to improved earnings per share (EPS) growth and underpin the FCF guidance of $13.5 billion for FY25, which exceeds JPMorgan’s projections.

While the analyst expressed optimism regarding the strength in IBM’s software sector and its potential to support better valuation levels, he also noted that the current stock price appears to factor in these positive developments. The company maintains a strong dividend track record, having raised dividends for 29 consecutive years, with a current yield of 2.92%. Moreover, growth for the year is anticipated to be more substantial in the latter half, driven by the z17 mainframe cycle and mergers and acquisitions. As a result, the firm has decided to keep a Neutral rating on IBM stock as it updates its estimates to reflect the recent results and revised outlook. For deeper insights into IBM’s valuation and growth prospects, including 10+ additional ProTips, visit InvestingPro.

In other recent news, IBM has been the focus of several significant developments. Evercore ISI raised the company’s stock price target to $275 from $240, following IBM’s earnings report that exceeded expectations. IBM reported a year-over-year revenue growth of approximately 2% in constant currency terms, primarily due to a robust performance in the software segment. The company also anticipates improvement in the Consulting division throughout 2025, based on an expected upturn in the broader IT spending environment.

RBC Capital Markets and Stifel analysts have maintained an Outperform and Buy rating on IBM shares, respectively, highlighting the company’s strong performance and future prospects. IBM also announced its intention to acquire Applications Software (ETR:SOWGn) Technology LLC, an Oracle (NYSE:ORCL) consultancy firm, to bolster its Oracle solutions, particularly in the public sector. This acquisition is expected to close in the first quarter of 2025, pending customary closing conditions and regulatory approvals.

Furthermore, IBM has partnered with Walmart (NYSE:WMT) GoLocal to streamline last-mile delivery for retailers, enabling IBM retail clients to incorporate Walmart GoLocal’s suite of delivery solutions into their operations. Bernstein analysts have maintained a Market Perform rating on IBM shares, acknowledging the company’s efforts to improve its growth rate. IBM has also resolved its legal disputes with GlobalFoundries (NASDAQ:GFS), opening up potential for future collaborations. These are the recent developments in IBM’s operations.

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