Last Update 18 Nov 25
IBM: Prospects Will Depend On Execution In Quantum And Software Amid Restructuring
The average analyst price target for International Business Machines has been adjusted slightly upward. This change reflects a combination of improved software performance, solid consulting and margin results, and a more optimistic view of IBM's long-term prospects in quantum computing and automation technologies.
Analyst Commentary
Recent research notes from multiple analysts reflect a nuanced view of IBM’s prospects, balancing strong growth narratives in key segments with continued near-term challenges. Both bullish and bearish perspectives focus on themes such as innovation, valuation, and execution, particularly in quantum computing, software, and consulting services.
Bullish Takeaways- Bullish analysts highlight IBM’s leadership in quantum computing. They note the company has the most quantum computers in use and a robust hardware and software roadmap that could unlock significant high-margin revenue over the long term.
- Solid Q3 performance in consulting and steady improvement in software execution are seen as positive indicators for sustained growth and margin expansion.
- Ongoing enhancements in cloud automation and developer engagement through platforms like Qiskit provide opportunities for IBM to maintain technical leadership and attract new enterprise customers.
- Upward adjustments to price targets reflect optimism around IBM’s strategic initiatives and its ability to drive incremental tailwinds from automation and recent acquisitions.
- Bearish analysts flag decelerating software performance in segments like Red Hat and Transaction Processing, indicating that IBM still faces hurdles to achieving the targeted 5 percent or higher revenue growth by 2026.
- There is caution around IBM’s premium valuation compared to peers. Some analysts see the current share price as already reflecting near-term positives, which may limit the potential for significant outperformance.
- Skepticism remains about whether quantum computing can become a material driver for the business in the near to medium term, despite recent headlines and early commercial use cases.
- Uncertainty persists regarding sustainable momentum in core infrastructure and consulting. Analysts are looking for clear signs of reacceleration in software growth before becoming more constructive on the shares.
What's in the News
- IBM plans to cut thousands of jobs this quarter as it shifts focus to high-growth software and services segments. This move is expected to impact a low single-digit percentage of its global workforce (Bloomberg).
- IBM is reported to have played a role in the development of China's digital surveillance infrastructure, collaborating with Chinese defense contractors on major policing systems (Associated Press).
- IBM holds a favorable position in the race for "Quantum advantage" and is aiming to commercialize quantum computing ahead of competitors such as Google and Microsoft. Potential breakthroughs are anticipated by 2030 (Wall Street Journal).
- Citigroup has recruited IBM’s head of data and AI for consulting as its new head of AI, highlighting the demand for AI leadership and expertise from IBM across industries (Business Insider).
- IBM CEO Arvind Krishnan attended a White House dinner with tech leaders and announced education commitments alongside other major AI and chip companies (Wall Street Journal).
Valuation Changes
- The Fair Value Estimate remains unchanged at $287.09, indicating continued consensus on IBM’s intrinsic valuation.
- The Discount Rate has fallen slightly, from 9.64% to 9.60%. This may reflect reduced perceived risk or shifts in market conditions.
- Revenue Growth expectations are steady, with the long-term projected rate unchanged at approximately 5.14%.
- The Net Profit Margin is essentially flat, with the updated estimate holding steady at 14.16%.
- The Future P/E Ratio has decreased modestly from 33.93x to 33.61x. This suggests minor changes in earnings expectations or market sentiment.
Key Takeaways
- IBM's strategy in hybrid cloud, AI, and strategic acquisitions could drive revenue growth, margin expansion, and client trust in modernizing IT infrastructure.
- Investments in advanced technologies like the z17 mainframe and generative AI enhance differentiation and pricing power, potentially boosting infrastructure revenue and net margins.
- Uncertain macroeconomic conditions and competitive pressures could affect Consulting and Software segments, with currency volatility posing further risks to revenue and growth.
Catalysts
About International Business Machines- Provides integrated solutions and services in the United States, Europe, the Middle East, Africa, Asia Pacific, and internationally.
- IBM's focused strategy on hybrid cloud and AI is driving solid revenue growth, providing cost savings, productivity gains, and scalability for clients, which is expected to continue supporting their revenue trajectory.
- The launch of the z17 mainframe with enhanced AI acceleration and energy efficiency is anticipated to drive significant customer adoption, positively impacting infrastructure revenue and possibly net margins due to differentiation and pricing power.
- IBM's continued investment in generative AI and integration through acquisitions such as HashiCorp is set to enhance their software capabilities, potentially boosting software revenue and supporting long-term margin expansion through high-value recurring revenue.
- Growth in IBM's Red Hat OpenShift and containerization services indicates strong demand and client trust, which could lead to increased revenue from the software segment as enterprises modernize their IT infrastructure.
- IBM's strategic diversification in its supply chain and disciplined cost management, combined with productivity initiatives, are poised to protect margins and enhance cash flow resilience amidst macroeconomic uncertainties.
International Business Machines Future Earnings and Revenue Growth
Assumptions
How have these above catalysts been quantified?- Analysts are assuming International Business Machines's revenue will grow by 5.1% annually over the next 3 years.
- Analysts assume that profit margins will increase from 9.1% today to 14.1% in 3 years time.
- Analysts expect earnings to reach $10.5 billion (and earnings per share of $10.51) by about September 2028, up from $5.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $8.2 billion.
- In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.7x on those 2028 earnings, down from 41.2x today. This future PE is greater than the current PE for the US IT industry at 29.0x.
- Analysts expect the number of shares outstanding to grow by 0.74% per year for the next 3 years.
- To value all of this in today's terms, we will use a discount rate of 9.71%, as per the Simply Wall St company report.
International Business Machines Future Earnings Per Share Growth
Risks
What could happen that would invalidate this narrative?- Uncertainty in the macroeconomic environment could lead clients to adopt a wait-and-see approach, impacting Consulting revenues due to discretionary project pullbacks and delays in decision-making.
- Federal business exposure, particularly consulting for government contracts, may face volatility due to potential discretionary spending cuts, impacting revenue growth.
- The Software segment's reliance on consumption-based services, which can be susceptible to macroeconomic downturns, poses a risk to sustained revenue growth.
- Competitive pressures in virtualization and the potential for a slowdown in Red Hat's consumption-based services could impact the anticipated growth trajectory and revenue realization.
- Currency volatility, especially significant fluctuations in the U.S. dollar, could create unexpected challenges in revenue projections and free cash flow generation.
Valuation
How have all the factors above been brought together to estimate a fair value?- The analysts have a consensus price target of $281.316 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 $350.0, and the most bearish reporting a price target of just $198.0.
- In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $74.4 billion, earnings will come to $10.5 billion, and it would be trading on a PE ratio of 33.7x, assuming you use a discount rate of 9.7%.
- Given the current share price of $259.11, the analyst price target of $281.32 is 7.9% 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.
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Disclaimer
AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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