Here’s why IBM stock is on the move

IBM’s stock rose 6% on Thursday following a strong Q2 earnings report

Big Blue was in profit on Thursday after IBM‘s (NYSE:IBM), stock rose by more than 6% following the release of second quarter earnings.

IBM’s revenue grew 2% over the previous year to $15.8 Billion, exceeding analyst estimates of $15.6 Billion.

Net income increased by 14% to $1.8 billion or $1.99 per share. This was below median earnings estimates of $ 2.18 per share. However, when adjusted to remove acquisition and other costs IBM beat estimates, with adjusted earnings of $1.99 per share.

IBM’s stock is up 20% so far this year.

GenAI drives earnings

IBM’s software business, whose revenue grew 7.1% to $6.7 billion in the quarter, accounted for most of its income. Consulting revenue fell 1% to $5 billion, while infrastructure revenue rose 1% to $3 billion.

Arvind Krishna, IBM Chairman and Chief Executive Officer, said that AI is driving earnings across the company, especially its watsonx platforms, during the earnings call.

Watsonx, launched just one year ago as a generative AI tool, allows clients to train their own AI models.

Arvind Krishna said that watsonx has been a success and the book of business we have for generative AI is now worth more than $2 billion.

The firm also managed to increase its free cash flow from $2.1 billion to $2.6 billion during the same quarter last year. IBM’s free cash flow for the first six-months of the year was $4.5 billion, which is $1.1 billion more than the first half in 2023.

Further, its gross margin increased to 56.8% from 54.9% a year earlier, while its operating margin has risen 110 basis points.

James Kavanaugh said that IBM’s senior vice president and chief finance officer, James Kavanaugh: “Our strong cash flow allows us to continue to invest in innovation and expertise throughout the portfolio while returning value to our shareholders through dividends.”

IBM raises outlook for free cash flow

IBM pays out one of the highest dividends in the market. The influx of cash flow should allow it to maintain it. IBM currently pays $1.67 per share, which is a yield of 3.63 percent. It has increased its dividend every year for 24 years straight.

IBM’s growth projections for the full year remain unchanged, with a mid-single digit revenue increase. It did, however, raise its operating margin guidance for the full year by half a percentage point and increase its estimate of free cash flow to 12 billion dollars.

IBM’s strong results in the second quarter led many Wall Street analysts, including Stifel BMO Capital Jefferies JPMorgan Chase and RBC Capital, to raise their price target for the stock.

Stifel, as an example, raised its price to $205, which is just 6% more than the current $193 price per share. JPMorgan raised it only to $195 which is slightly more than the current price.

Should you buy IBM stock?

IBM stock is worth keeping on your radar. It is relatively inexpensive, with a P/E ratio of 20 and an forward P/E ratio of 18.

Second, the rapid growth of its generative AI platform, which has seen its business book grow to $2 billion within a year across all its segments, is encouraging. Its specialization in AI training could be a lucrative niche as more and more businesses use AI, and require their models to work reliably and trustworthily.

Its free cash flow is impressive as it will enable it to maintain the already high dividend and invest in business and technology.

IBM stock has already increased by 20% YTD. It is unclear how much further it will rise over the next few months. As a dividend stock, it’s worth a purchase. And as a long-term hold, it’s a solid choice.

This site is intended for entertainment only and does NOT offer financial advice.

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