Computing behemoth IBM
We expect IBM’s core software operations to remain a key driver of growth for the quarter. Over Q4, software sales grew by 5% year-over-year, driven by higher sales of Data & AI solutions and Red Hat
Looking at a slightly longer period, IBM stock has seen extremely strong gains of 50% from levels of $125 in early January 2021 to around $185 now, vs. an increase of about 35% for the S&P 500 over this roughly 3-year period. IBM is one of a handful of stocks that have increased their value in each of the last 3 years, but that still wasn’t enough for it to consistently beat the market. Returns for the stock were 6% in 2021, 5% in 2022, and 16% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that IBM underperformed the S&P in 2021 and 2023. In fact, consistently beating the S&P 500 - in good times and bad - has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including MSFT, AAPL, and NVDA, and even for the mega-cap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could IBM face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months - or will it see a strong jump?
At the current market price of about $186 per share, IBM stock trades at close to 20x consensus 2024 earnings, which is elevated, compared to historical levels. While IBM’s business is increasingly focused on hot areas such as cloud computing, AI, and automation, growth is likely to remain muted in the near term, with the consensus pointing to low double-digit revenue growth for 2024 and 2025. We value IBM stock at $177 per share, which is slightly below the current market price. See our analysis IBM Valuation: Expensive or Cheap for more details on what’s driving our price estimate for IBM. Also, check out the analysis of IBM Revenue for more details on how IBM revenues are trending.
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