News
Is It Time to Buy IBM Stock?
International Business Machines (NYSE: IBM) beat expectations with its second-quarter earnings report last week, reporting solid revenue and adjusted earnings growth. While the consulting segment was a bit of a weak spot, a strong software segment and surprising growth from the infrastructure segment were enough to push revenue at constant currency up 4% year over year.
On top of beating analyst analysts for the second quarter, IBM bumped up its outlook for the full year. The company still expects to produce mid-single-digit revenue growth at constant currency, but it now foresees free cash flow above $12 billion. Previously, IBM's guidance called for approximately $12 billion of free cash flow.
With IBM becoming more confident in its ability to churn out free cash flow, is it time to buy the storied technology stock?
Software and infrastructure strength
In IBM's consulting segment, the company is seeing clients continue to pull back on discretionary projects in favor of projects with clear returns on investment in the form of cost savings or productivity gains. The consulting segment grew revenue by just 2% at constant currency in the second quarter as it was weighed down by this reality.
The good news is that IBM is seeing plenty of interest in its generative AI offerings. The company has now booked more than $2 billion worth of business related to generative AI, with about 75% of that total coming from the consulting segment. So while consulting demand is a mixed bag, there are areas where clients are spending freely.
The software business was the star of IBM's second quarter, with revenue rising by 8% year over year. Red Hat revenue was up 8%, automation revenue was up 16%, and transaction processing revenue soared 13%. IBM's watsonx Code Assistant for Z , which uses generative AI to modernize legacy mainframe code, helped boost transaction processing revenue during the quarter.
Speaking of mainframes, the IBM Z mainframe business managed to grow revenue by 8% in the second quarter. IBM is deep in the current mainframe product cycle, and this is usually the point where sales decline as the company works toward launching its next-generation system. The current-gen z16 mainframe is now more than two years old, and sales are tracking well ahead of previous product cycles.
A reasonably priced stock
Despite the sluggish growth in the consulting segment, IBM now expects to generate more than $12 billion of free cash flow this year. With a market capitalization of about $175 billion, IBM stock trades for less than 15 times the free cash flow outlook.
While shares of IBM aren't the bargain they were in mid-2023, the valuation looks reasonable given the company's long-term growth prospects. IBM is targeting mid-single-digit annual revenue growth and somewhat faster pre-tax profit growth.
IBM stock is closing in on surpassing its all-time high, set about a decade ago. Since that time, the company has shed legacy businesses, bet on hybrid cloud computing and AI, and leaned out considerably. The IBM of today is capable of sustainable and profitable growth, and even though it's surged over the past year, it's not too late to buy the stock.
Before you buy stock in International Business Machines, consider this: