IBM Stock Beats EPS Estimates, Sees Higher GenAI Demand

International Business Machines (NYSE: IBM) is a technology firm and is the world’s third-largest company in the IT Services industry with a market capitalization of $170 billion. Let’s dive into the firm's annual filing to understand its sources of revenue and business segments. We'll then review important developments from the firm's recent earnings report, released on July 24, 2024. Lastly, we’ll close by detailing opportunities for IBM going forward and its valuation.

IBM: Leader in Hybrid Cloud Computing and AI Expertise

IBM is a leader or one of the leading players in each of its segments: Software, Consulting, Infrastructure, and Financing. The Software segment provides companies with solutions to manage and integrate their computing resources. It integrates onsite hardware, private cloud environments, and public cloud environments, creating what IBM calls a “hybrid cloud” platform.

Red Hat OpenShift is one of the firm's most important software products. The software helps developers and IT teams create “containerized applications." Containerized applications contain all the components they need to run within them, allowing for their use across various cloud-based and hardware-based computer environments. This vastly increases the usefulness of these applications. Red Hat is currently one of IBM's key drivers of growth.

It also has AI platforms. These help clients navigate the digitalization of their business and implement AI transformations. Watsonx is software that offers AI and machine learning tools. Businesses can use it to boost efficiency and make better decisions. The software segment made up 43% of revenue in 2023 and 60% of gross profit.

IBM’s Consulting segment helps companies navigate and be more competitive in their markets through various vectors. It involves working with companies to create solutions to their specific needs by leveraging IBM’s technology. This helps firms improve their business models, build cloud environments, and implement AI. It made up 32% of revenue and 15% of gross profit.

The Infrastructure segment makes up the hardware-based component of the “hybrid cloud” platform. The company provides servers for tasks like processing transactions, analyzing data, and storing information. These servers interact seamlessly with the company’s cloud-based software to create the hybrid cloud. This segment accounted for 24% of revenue and 23% of gross profit.

IBM: Beats EPS Estimates, Watsonx Platform Sees Increased Interest

IBM beat adjusted earnings per share estimates (EPS) solidly, coming in at $2.43. Analysts expected $2.17. Revenue also came in $15 million above estimates at $15.77 billion. The firm also upwardly revised its full-year free cash flow guidance from “about $12 billion” to “more than $12 billion."

The company’s generative AI-related business saw increased demand as firms gravitated toward IBM’s expertise in the space. CEO Arvind Krishna said it now generating over $2 billion since the launch of Watsonx a year ago. Red Hat saw revenues up 8% in constant currency, and the software segment overall was up 8.4%. Margins also improved. Adjusted gross margin increased 190 basis points, and adjusted pre-tax income margin increased 220 basis points.

Shares jumped 2% to 3% in after-hours trading.

IBM: Attractive Valuation and Opportunities in AI Implementation

IBM's valuation seems attractive. Investors can observe this in its forward price-to-earnings (P/E) ratio and its price-to-free cash flow (P/FCF) ratio, which sit at 19x and 13x, respectively. Although both numbers are near the top of the firm's range over the past 10 years, they are low compared to the U.S. Information Technology sector. Forward P/E sits at the 30th percentile, and P/FCF sits at the 21st percentile.

At the same time, the firm has an operating margin that sits above the 80th percentile, and its return on equity is in the 94th percentile. It does have a high debt-to-equity ratio; however, it has a solid ability to pay back its debt, with a net debt-to-EBITDA ratio of three after accounting for capital expenditures. Overall, IBM's debt situation is not fantastic, but it is also not something to worry about greatly.

IBM seems to have entrenched advantages and expertise that the market may not fully appreciate. The company’s business segments feed off one another, allowing business from one to translate into more business for another.

Additionally, the firm's expertise in digital infrastructure gives it an advantage in understanding the best ways companies can implement AI. So far, AI implementation seems to be in its early phases, presenting a large opportunity for IBM. The success of the Watsonx platform demonstrated this during the quarter.

The article "IBM Stock Beats EPS Estimates, Sees Higher GenAI Demand" first appeared on MarketBeat.