IBM shares surge on strong results, accelerating AI adoption By

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IBM shares jump on strong results, accelerating AI adoption

(Updated – January 25, 2024 10:12 AM EST)

Shares of IBM (NYSE:) jumped over 11% Thursday after the enterprise software maker reported better-than-expected earnings per share (EPS) and revenue for Q4.

The company posted a fourth-quarter EPS of $3.87, beating the consensus projection of $3.77. Revenue came in at $17.38 billion, while analysts were looking for $17.23 billion.

Of that, $7.51 billion was software revenue, up 3.1% year-over-year, though below the Wall Street expectations of $7.69 billion. Consulting segment revenue stood at $5.05 billion, up 5.8% from a year earlier, and compared to $5.11 billion expected by analysts.

IBM generated $4.6 billion in infrastructure revenue, up 2.7% YoY and above the projected $4.35 billion.

Adjusted gross margin for Q4 was 60.1%, compared to 58.6% in the year-ago quarter and the 58.8% expected by analysts. Free cash flow stood at $6.09 billion, 17% higher than in the same quarter last year. Analysts expected $5.37 billion.

“In the fourth quarter, we grew revenue in all of our segments, driven by continued adoption of our hybrid cloud and AI offerings,” said Arvind Krishna, IBM chairman and CEO.

“Client demand for AI is accelerating and our book of business for Watsonx and generative AI roughly doubled from the third to the fourth quarter.”

Looking ahead, IBM expects a free cash flow of $12 billion for the full fiscal year, better than the $10.92 billion estimated by analysts.

The software firm also expects its revenue to grow roughly around 4-6% in 2024, which is better than Wall Street expectations of about 3%.

“We think the print and guide, especially FCF guide are positive for the story. Focus for IBM will be can they execute and show consistent growth on Software and can Consulting acceleration in CY24 sustain in the same zip code as their Consulting peers,” analysts at Evercore ISI said in a note.

“Our sense is IBM remains an underappreciated AI beneficiary that should continue to work higher over the next few years.”

Analysts at Evercore ISI also lifted the price target by $15 to $215 per share on the Outperform-rated stock.

Meanwhile, BofA Securities analysts raised their price target from $170 to $200 and reiterated a Buy rating. They said that given the strong cash flow trajectory they see the company delivering close to $13 billion in FCF in fiscal year 2025.

“Reiterate Buy as the turnaround at IBM (rev growth and FCF improvement) continues, with a defensive portfolio, attractive dividend yield and underappreciated AI portfolio,” BofA analysts added.

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