Generative AI Leadership And Z17 Mainframe Will Strengthen Future Prospects

Key Takeaways

• IBM's leadership in generative AI and acquisitions enhances Software and Consulting growth, boosting revenue and margins.
  
• The z17 mainframe launch will sustain Infrastructure demand and support AI-driven revenue and earnings expansion.
  
• Geopolitical tensions, currency impacts, and strategic acquisition challenges could suppress IBM's revenue growth, margins, and international profitability amid changing client priorities.

Catalysts

Provides integrated solutions and services in the United States, Europe, the Middle East, Africa, Asia Pacific, and internationally.

• IBM's early leadership in generative AI, evidenced by a $5 billion GenAI book of business, supports accelerated growth in both Software and Consulting, potentially driving revenue and earnings growth as AI becomes more integral to IBM's offerings.
  
• Strong momentum in Software, with a focus on hybrid cloud solutions and platforms like Red Hat and OpenShift, indicates continuous double-digit growth, likely enhancing IBM's revenue and operating margins.
  
• The upcoming launch of the z17 mainframe in mid-2025 is positioned as a critical catalyst to sustain Infrastructure revenue and capture demand for AI and data requirements, which could positively impact revenue and earnings.
  
• Strategic acquisitions, such as Neural Magic and the pending HashiCorp deal, aim to strengthen IBM's AI and cloud capabilities, potentially driving revenue growth and improving operating leverage and margins.
  
• Consulting's record quarterly signings and the growth in backlog, combined with investments in partnerships and GenAI, are expected to support revenue growth acceleration, enhancing both revenue and net margins in the future.

International Business Machines Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming International Business Machines's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.6% today to 14.5% in 3 years time.
• Analysts expect earnings to reach $10.3 billion (and earnings per share of $10.57) by about April 2028, up from $6.0 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $11.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.2x on those 2028 earnings, down from 37.1x today. This future PE is lower than the current PE for the US IT industry at 32.6x.
• Analysts expect the number of shares outstanding to grow by 0.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.47%, as per the Simply Wall St company report.

International Business Machines Future Earnings Per Share Growth

Risks

• Geopolitical tensions, interest rate volatility, supply chain vulnerabilities, and evolving cyber threats are creating headwinds that could impact IBM's revenue growth and profitability.
  
• Consulting revenue was down 1% and continued to be impacted by a dynamic market environment as clients reprioritize spending, which could suppress future revenue and margins.
  
• Infrastructure revenue was down 6%, reflecting product cycle dynamics, which could negatively impact revenue from this segment.
  
• The planned acquisition of HashiCorp, while strategically beneficial, is expected to be dilutive to IBM’s earnings per share in the short term, which could affect net margins and earnings.
  
• The impact of a strong U.S. dollar presents a headwind, potentially affecting revenue and profitability in international markets due to currency exchange effects.

Valuation

• The analysts have a consensus price target of $255.489 for International Business Machines based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $320.0, and the most bearish reporting a price target of just $160.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $71.0 billion, earnings will come to $10.3 billion, and it would be trading on a PE ratio of 30.2x, assuming you use a discount rate of 8.5%.
• Given the current share price of $240.9, the analyst price target of $255.49 is 5.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.