Computing behemoth IBM (NYSE:IBM) recently released its Q4 results, with revenue and earnings exceeding the street estimates. It reported sales of $17.6 billion and adjusted earnings of $3.92 per share. This compares with the consensus estimates of $17.5 billion and $3.75, respectively. Strong demand for AI solutions and robust Red Hat Linux performance are driving the company’s software business growth. IBM stock surged over 8% post the results announcement. However, it seems to be fully valued now.
IBM stock, with 45% returns since the beginning of 2024, has outperformed the S&P 500 index, up 27%. Strong demand trends for its software business has driven its stock price growth lately. But, if you want upside with a smoother ride than an individual stock, consider the High-Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.
How Did IBM Fare In Q4?
IBM Revenue of $17.6 billion in Q4 reflected a 1% y-o-y growth, as a 10% growth in software sales was largely offset by an 8% decline in the infrastructure segment, a 1.1% fall in consulting sales, and a 2.5% decline in financing revenue. IBM’s core software operations remain a key driver of growth for the company. Within software, Data & AI solutions and Red Hat products have been leading the growth. While Data & AI sales were up 4%, Red Hat products saw a 16% y-o-y growth.
IBM has been looking to capitalize on the rising demand for artificial intelligence in the enterprise space. It introduced – Watsonx – its core platform that enables enterprise clients to train, tune, validate, and deploy customized AI models for their businesses. IBM has said that client demand for AI solutions has been accelerating. The company’s generative AI business has secured $5 billion in bookings across its software and consulting segments.
IBM also saw a 50 bps rise in adjusted operating margin to 60.6%. Slight growth in sales clubbed with margin expansion resulted in earnings of $3.92 per share, up 1% y-o-y. Looking forward, the company expects at least 5% top-line growth $13.5 billion in free cash flows in 2025.
What Does This Mean For IBM Stock?
Looking at IBM stock, it surged over 8% in after market hours on Wednesday, Jan 29. Notably, IBM is one of a handful of stocks that have increased their value in each of the last four years, but that still wasn’t enough for it to consistently beat the market. Returns for the stock were 16% in 2021, 11% in 2022, 22% in 2023, and 39% in 2024.
The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it has comfortably outperformed the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment around rate cuts and rise of DeepSeek, could IBM face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months — or will it see a strong jump? While we will soon update our model for IBM to reflect the latest results, we think the stock is fully valued. At its current levels of around $245, IBM is trading at 3.7x trailing revenues, versus the stock’s average P/S ratio of just 2.2x over the last five years. Now, a slight rise in valuation multiple seems justified, given the increased contribution of AI to the software growth, bolstering the company’s top and bottom-line growth. Still, we think investors will be better off waiting for a dip or pick other tech stocks, such as MSFT for robust long terms gains.
While IBM stock looks like it is fully valued, it is helpful to see how IBM’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
| Returns | Jan 2025 MTD [1] |
Since start of 2024 [1] |
2017-25 Total [2] |
| IBM Return | 4% | 45% | 106% |
| S&P 500 Return | 3% | 27% | 170% |
| Trefis Reinforced Value Portfolio | 6% | 23% | 802% |
[1] Returns as of 1/30/2025
[2] Cumulative total returns since the end of 2016
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
