Should We Consider Purchasing IBM Shares Now?
IBM rallied past expectations in its second-quarter earnings report, boasting a 4% year-over-year revenue increase at constant currency. This performance was bolstered by a robust software segment and surprising growth from the infrastructure segment, despite some weakness in the consulting sector. With IBM's newfound optimism and elevated expectations, one has to wonder: is now the right time to snatch up the iconic tech stock?
Software and Infrastructure Milestones
IBM's consulting realm is seeing clients shift their focus towards projects that guarantee tangible returns in the form of cost savings and productivity enhancements. This shift resulted in a 2% increase in revenue at constant currency for the consulting segment, despite the overall mixed demand. However, IBM's AI offerings are drawing plenty of interest. The company has currently secured over $2 billion worth of business related to generative AI, with 75% of that total originating from the consulting segment.
The software segment emerged as the star performer for IBM, posting an 8% revenue boost year-over-year. Driving this growth were Red Hat, which saw a 8% increase at constant currency, automation, surging 16%, and transaction processing, up an impressive 13%. IBM's Watsonx Code Assistant for Z, which utilizes generative AI to modernize legacy mainframe code, played a sizable role in propelling transaction processing revenue during the quarter.
On the mainframe front, IBM Z managed to grow revenue by 8% in the second quarter. Normally, sales decelerate during the current product cycle as the company prepares to unveil its next-generation system. However, the current-gen z16 mainframe outperformed expectations, tracking ahead of previous product cycle sales.
A Value-Packed Stock Option
Despite the consulting segment's sluggish growth, IBM now anticipates churning out over $12 billion in free cash flow for 2025. With a market capitalization of about $175 billion, IBM shares are trading at less than 15 times this year's free cash flow outlook.
While the stock hasn't reached the bargain prices it offered in mid-2023, the valuation appears reasonable given IBM's long-term growth prospects. IBM is targeting a minimum of 5% annual revenue growth through 2025, along with faster pre-tax profit growth. IBM's stock is drawing close to surpassing its all-time high, which it achieved a decade ago.
Since then, IBM has shed legacy businesses, wagered on hybrid cloud computing and AI, and streamlined its operations significantly. The new, leaner IBM is well-positioned to sustain and profit from growth, making it an appealing investment prospect even after its recent surge.
In light of IBM's strong performance, with its software segment leading the way and generating an 8% year-over-year revenue increase, some investors might be considering investing in the tech giant's shares for potential financial gains.
Given IBM's solid financial standing, boasting expected free cash flow of over $12 billion by 2025, and a reasonable valuation compared to its long-term growth prospects, finance experts might recommend considering IBM as a wise investment option for those looking to grow their money in the finance market.
