IBM Earnings: Strong AI Backlog and 2025 Guidance Drive Up Shares

Key Morningstar Metrics for International Business Machines

• Fair Value Estimate: $250.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

What We Thought of International Business Machines’ Earnings

International Business Machines IBM reported good fourth-quarter earnings which surpassed both our top-and bottom-line expectations. Red Hat was a key growth driver during the quarter, reflecting robust demand for hybrid solutions. This strength was offset by a decline in consulting revenue, which continued to be impacted by stringent discretionary spending by customers. Management unveiled a robust outlook for fiscal 2025, projecting 5% year-over-year growth in constant currency and further margin expansion.

We are revisiting our expectations as we transfer coverage to a new analyst. We have raised our revenue and profitability outlook materially to reflect our increased confidence in IBM’s ability to benefit from growing artificial intelligence and digital transformation spending. The recent quarter’s performance reinforced our confidence, as the firm’s AI-related bookings grew $2 billion sequentially to $5 billion. While we anticipate tight IT spending to dampen near-term results, we expect growing demand for AI deployment to drive sales for IBM’s consulting and software arms and boost long-term growth. As a result, we are raising our fair value estimate to $250 per share from $139 and now view the stock as fairly valued.

Fourth-quarter revenue reached $17.6 billion, up 2% year over year in constant currency. Software grew 11% year over year in constant currency due to strong demand for Red Hat and transaction solutions. This growth was partially offset by infrastructure revenue, which declined 6% year over year in constant currency, though management is optimistic about the launch of the upcoming mainframe to help turn the tides. Consulting revenue declined 1% year over year in constant currency, but we anticipate a recovery in the second half of fiscal 2025 as the firm continues to convert its growing backlog. We expect this demand to also trickle down to software sales due to growing customer preference for vendor consolidation.