IBM's Critical Moves in AI, Quantum Computing, and Partnerships Set to Fuel Revenue Surge

What are the underlying business or industry changes driving this perspective?

• The launch of watsonx, IBM's flagship AI and data platform, and its early traction point towards growth in AI-based offerings, potentially impacting revenue growth in the AI and data segment.
• Continued expansion in consulting services, particularly in durable revenue growth through technological and AI consulting, which is expected to continue outpacing competitors, thus contributing positively to revenue growth.
• Strengthening of the zSystems platform and related client wins, indicating ongoing demand for IBM's high-performance computing solutions which may lead to increased revenue in infrastructure and associated software.
• Strategic partnerships with companies like Adobe and SAP, along with the expansion of its ecosystem, are anticipated to drive further integration and adoption of IBM technologies, potentially enhancing software segment revenue.
• Investments in innovation, including quantum computing and AI governance, alongside strategic acquisitions (e.g., Apptio, StreamSets, and webMethods) are set to fuel revenue growth by feeding into IBM's hybrid cloud and AI capabilities.

How have these above catalysts been quantified?

• Analysts are assuming International Business Machines's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.1% today to 12.9% in 3 years time.
• Analysts expect earnings to reach $9.0 billion (and earnings per share of $9.76) by about March 2027, up from $7.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.9x on those 2027 earnings, down from 23.6x today.
• To value all of this in today’s dollars, we will use a discount rate of 8.15%, as per the Simply Wall St company report.

What could happen that would invalidate this narrative?

• The company's reliance on strategic acquisitions for growth could face challenges like integration risks and achieving the expected value, potentially impacting its revenue growth and return on invested capital (ROIC).
• Red Hat's performance, although expected to contribute significantly to growth, may not meet expectations if the demand for hybrid cloud and application modernization doesn't materialize as anticipated, affecting software segment revenue.
• The AI book of business's expected growth, based on signings and client commitments, might not convert into actual revenue as anticipated, affecting the company's software transactional revenue and Software as a Service (SaaS) Average Contract Value (ACV).
• Execution risks in ramping up the consulting practice around generative AI and other technologies could limit the company's ability to outpace competitors and achieve projected consulting revenue growth.
• Macro-economic uncertainties and potential shifts in technology investment priorities by businesses could lead to reduced demand for IBM's services, impacting its overall revenue growth and profitability.

• The analysts have a consensus price target of $183.04 for International Business Machines based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with this, you'd need to believe that by 2027, revenues will be $69.7 billion, earnings will come to $9.0 billion, and it would be trading on a PE ratio of 21.9x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of $193.43, the analyst's price target of $183.04 is 5.7% lower. The relatively low difference between the current share price and the analyst target indicates that they believe 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.