Rising demand for cloud and AI services boosts IBM stock 46% in the past year

We see IBM as a great way for investors to successfully tap the fast-growing artificial intelligence (AI) field. This legacy tech firm was in fact an early pioneer in AI. In 2011: representing an AI milestone, the firm’s Watson supercomputer beat human contestants on the Jeopardy game show.

More recently, rising client demand for AI services has lifted the stock by 45.9% in the past year. Its rising earnings also give it more room for dividend hikes.

The stock trades at 21.1 times the company’s forward earnings forecast, a very reasonable valuation for a diversified business model that’s focused on the fast-growing AI market. This is a very solid pick and relatively low risk path to capitalize on long-term AI benefits.

IBM (New York symbol IBM; www.ibm.com) is one of the world’s largest computer firms, with operations in over 175 countries.

In the past few years, IBM has shifted its focus to its more profitable cloud computing, consulting and mainframe businesses. It now gets 75% of its revenue from its software and consulting businesses.

As part of that strategy, IBM paid $34 billion in July 2019 for Red Hat—the leading developer of cloud-based software.

Despite the Red Hat acquisition, IBM’s revenue fell 4.6%, from $77.15 billion in 2019 to $73.62 billion in 2020. That’s mainly because some businesses deferred investments in new technology due to the COVID-19 pandemic.

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In November 2021, IBM spun off some of its legacy consulting operations as Kyndryl Holdings Inc. (New York symbol KD). As a result, revenue fell 17.8% to $57.35 billion in 2021; on a comparable basis, revenue actually rose 3.9%. In 2022, revenue improved 5.5% to $60.53 billion on stronger demand for its software and hybrid cloud products. Revenue gained a further 2.2% to $61.86 billion in 2023.

Earnings before unusual items fell 32.3%, from $12.81 a share (or a total of $11.44 billion) in 2019 to $8.67 a share (or $7.77 billion) in 2020. Earnings then improved 15.0% to $9.97 a share (or $9.02 billion) in 2021, but they fell 8.4% to $9.13 a share (or $8.33 billion) in 2022 because of the Kyndryl spinoff. Earnings rebounded 5.4% in 2023, to $9.62 a share (or $8.87 billion).

Blue Chip Stocks: Circle: IBM Reports Earnings Growth Alongside Key Strategic Acquisitions

In the three months ended September 30, 2024, IBM’s revenue rose 1.5%, to $14.97 billion from $14.75 billion a year earlier. Revenue rose 9.7% for IBM’s software businesses; that offset 0.5% lower revenue at its consulting unit and 7.0% lower revenue for its mainframe computers and other hardware (that business is at the end of a three-year product cycle, when sales cyclically slump).

Earnings excluding one-time items gained 6.1%, to $2.16 billion from $2.03 billion. Due to more shares outstanding, per-share earnings rose 4.5%, to $2.30 from $2.20. The higher earnings growth is largely due to a plan to improve productivity.

Meantime, IBM often buys other companies to enhance its expertise. It cuts the risk of using acquisitions to expand by targeting smaller firms that are easier to absorb.

For example, IBM recently agreed to buy Accelalpha. Based in Bellevue, Washington, this firm helps businesses implement and manage their applications that run on the cloud platforms of software developer Oracle Corp. (New York symbol ORCL). The purchase price has not yet been disclosed.

This acquisition expands IBM’s Oracle consulting expertise in supply chain and logistics, finance, enterprise performance management and customer transformation.

The acquisition builds on IBM’s nearly 40-year collaboration with Oracle.

IBM is also buying HashiCorp Inc. (Nasdaq symbol HCP). That firm makes software to help companies set up and manage their cloud-based computer networks.

Assuming HashiCorp shareholders and regulators approve, IBM will pay $6.4 billion when the deal closes, probably by the end of 2024.

IBM’s shares have gained 45.9% in the past year due to investor enthusiasm for AI. They now trade at 21.1 times the $10.74 a share the company will probably earn in 2025. That’s a particularly attractive multiple, as IBM spends a high 12% of its revenue on research and is adding artificial intelligence features to its software products.

With the June 2024 payment, IBM raised your quarterly dividend by 0.6%, to $1.67 a share from $1.66. The new annual rate of $6.68 yields 3.0%. The company has paid regular dividends since 1916 and has increased the annual rate yearly for the past 29 years.

Recommendation in Canadian Wealth Advisor: IBM Corp. is a buy.

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Scott Clayton

Scott is an associate editor at TSI Network. He is the lead reporter and analyst for Dividend Advisor, Power Growth Investor and Canadian Wealth Advisor and a member of the Investment Planning Committee. Scott began his investment and financial career working with Pat McKeough at The Investment Reporter in the 1980s. Subsequently, he worked at the Financial Post Corporation Service for 10 years. He joined TSI Network in 1998. He is a Bachelor of Economics graduate of York University, and he also has an M.B.A. from the Schulich School of Business.

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