IBM's Resurgence: AI and Cloud Computing Drive Stock to All-Time High

Has IBM Stock Become a Buy? | The Motley Fool

International Business Machines (IBM -1.00%) stock surged 14% higher following its fourth-quarter and 2024 earnings report. Under CEO Arvind Krishna, the company has redefined itself as primarily a hybrid cloud and artificial intelligence (AI) company, and his leadership reversed what had been a long-term decline in the stock. Consequently, the stock price has risen by around 35% over the last year. Now, investors must assess whether the stock remains a buy with a higher earnings multiple and lower dividend yield. Krishna's turnaround at IBM began before he became CEO. As a division head, he spearheaded the purchase of Red Hat in 2019. This move made IBM a meaningful player in the hybrid cloud, and after taking the CEO job in April 2020, Krishna acquired more cloud companies. Also, soon after GPT-4 changed the face of AI, IBM launched watsonx to support its work in next-generation foundation models. These developments led to the strong performance of its software segment, which grew its revenue by 8% during 2024. Additionally, work in quantum computing has flourished under Krishna. While the technology has not yet gained widespread commercial interest, its ecosystem firmly positions IBM to prosper in this industry as more applications appear. Furthermore, IBM's dividend has risen for 29 straight years. At $6.68 per share annually, its dividend yield is 2.5%, even after the stock price increases. This is more than double the S&P 500 average of 1.2%, presumably making IBM stock an excellent choice for dividend investors. However, other parts of the company resemble the stagnant IBM of the past. The consulting and infrastructure businesses still generate more combined revenue than the software segment. Unfortunately, consulting revenue grew by only 1%, while infrastructure revenue dropped 4% yearly in 2024. Unsurprisingly, the differing results of IBM's segments affected its financial performance. In 2024, revenue of $63 billion grew by 1% yearly. Moreover, its 2024 net income actually fell to $6.0 billion versus $7.5 billion in 2023. A $2.8 billion decrease in income from foreign currency and other investments caused the drop, which indicates the lower earnings are not as concerning as they might appear. Additionally, IBM's management offered a rosier outlook for the immediate future, revealing that the company expects revenue growth to rise to 5% in 2025. By the same token, it predicts free cash flow will rise to $13.5 billion in 2025, up from the $12.7 billion generated in 2024. This bodes well for continued increases in the dividend, which should reassure the stock's shareholders. Unfortunately, investors will have to pay for this increased prosperity. Thanks to the rising stock price, its price-to-earnings (P/E) ratio is now 39, well above the S&P 500 average of 30. Admittedly, the forward P/E ratio is a more modest 23, which may have helped fuel the rising stock price. Still, the stock has undoubtedly become more expensive, and investors will have to decide whether it still offers value. At current levels, IBM is more likely a hold. Given the record-high stock price and its rising prominence as a cloud and AI stock, one has to assume IBM has orchestrated a comeback under Krishna. Consequently, the success has led to significant gains for its shareholders. Indeed, the successes would likely improve if IBM could either revive or sell its stagnant consulting and infrastructure businesses. Nonetheless, the revenue forecast strongly indicates that the cloud and AI segments have revived IBM as a force in the tech industry, meaning investors should probably consider the stock if the valuation falls below the S&P 500 average.

Is IBM Stock a Buy at an All-Time High? | The Motley Fool

It's been a long road for International Business Machines (IBM -1.00%) investors. The company kicked off a transformation effort more than a decade ago, forced to adapt to a tech industry that was rapidly embracing cloud computing. Years of inconsistent results followed as the company exited businesses and spent many billions of dollars on acquisitions. Some initiatives, like the company's early efforts to apply artificial intelligence (AI) technology to healthcare, were abject failures. Others, like the acquisition of software company Red Hat, have been roaring successes. IBM has leaned into high-margin software while using its consulting business to help drive adoption. Its hybrid cloud and AI software platforms are at the center of the company's best long-term growth opportunities. Red Hat software revenue soared 17% year over year in the fourth quarter, and IBM surpassed $5 billion in cumulative bookings for generative AI-related business. Over the past couple of years, things have finally been clicking. The stock has responded to IBM's improving fortunes by soaring to an all-time high. Shares of IBM were up more than 10% by midday Thursday following the fourth-quarter report, carving out a new all-time high in the process. The stock has risen by about 90% over the past three years, and it's now up around 36% over the past year alone. With IBM stock finally breaking out of its funk and trading at record levels, should investors buy into the growth story? At its core, IBM's mission is to enable its clients to grow revenue, improve productivity, and boost efficiency. The company does this through software, consulting, and hardware. Software has become the largest component of IBM's revenue, accounting for about 45% of the total. While IBM's software business generates high profit margins, the consulting business does a lot of the heavy lifting. Consulting is a less profitable affair, but it helps drive adoption of IBM's software platforms and products. For example, of the $5 billion in generative AI bookings the company has amassed, about $4 billion of that total were in the form of consulting signings. IBM has embraced strategic partnerships with other technology companies, paving the way for new business that the company wouldn't have otherwise won. Since many enterprises are already using Amazon's AWS or Microsoft Azure for cloud computing, much of IBM's software can be deployed anywhere, and its consulting business is free to craft solutions that make use of those cloud platforms. A company that wants to modernize its IT infrastructure by moving some workloads to AWS, for example, can turn to IBM for its consulting services and its hybrid cloud platform. The hardware segment isn't as important for IBM as it once was, but it's still a key part of the company's strategy. IBM's mainframe systems continue to enjoy wide use across certain industries, including financial services, and the latest z16 mainframe family has been the most successful mainframe generation in the company's history. Beyond mainframe sales, IBM can sell additional products to mainframe customers. One example is the watsonx Code Assistant for Z, a generative AI tool that helps mainframe customers modernize legacy applications. IBM grew revenue by 3% in 2024, adjusted for currency. This year, the company expects revenue growth to accelerate to at least 5%. A booming software business will help the cause. Software revenue rose by 9% last year, and IBM expects growth to approach double digits again in 2025. Consulting has been a mixed bag, with plenty of demand for digital transformations offset by weakness in more discretionary areas. Demand for AI consulting services could help return the segment to growth in 2025, although there are a lot of moving parts. Lastly, a new mainframe family is set to launch this year, which will contribute about 1 percentage point of revenue growth. IBM expects to generate free cash flow of $13.5 billion this year, up from $12.7 billion in 2024. Based on the current market capitalization, IBM stock trades for roughly 17.5 times that free cash flow guidance. The stock isn't a clear-cut bargain, but it's not expensive either. IBM is far from the fastest-growing tech giant, but the company has returned to consistent and sustainable growth. Revenue growth is accelerating as IBM's bets on hybrid cloud computing and AI pay off, and profit margins are expanding as well. IBM's valuation isn't as attractive as it was a year ago, but even at an all-time high, long-term investors should seriously consider adding IBM to their portfolios.