International Business Machines shares edged lower in early Friday trading following a bullish note from Bank of America highlighting the group’s positioning ahead of its fourth-quarter earnings and investor day event over the next two weeks.
IBM (IBM) shares have rebounded firmly from the slump that followed their third-quarter earnings in October, rising nearly 10% since Election Day as investors bet that an improving business outlook will boost its key consulting and software sales divisions.
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The iconic tech group now generates around two-thirds of its overall revenues from those two segments, with infrastructure sales comprising around 24%. Growth prospects for all three divisions, however, are closely linked to IT and broader tech spending budgets.
And with around half of its overall revenues in all divisions coming from non-U.S. markets, IBM’s bottom-line growth is also tied to the strength of the dollar, which hit a two-year high against a basket of its global currency peers earlier this month.
IBM CEO Arvind Krishna is looking to add cloud infrastructure specialists HashiCorp to the group’s powerhouse software division following a $6.4 billion takeover last year.
IBM
Bank of America analyst Wamsi Mohan says that’s likely to intensify over the coming year and weigh on profit growth. In a Thursday note, Mohan reiterated his ‘buy’ rating and $260 price target.
IBM earnings, investor day are key
IBM will publish its fourth-quarter earnings after the close of trading on Wednesday, Jan. 29, and host an investor day event that will include updates to its medium-term outlook covering the next two years.
Analysts are looking for a bottom line of $3.80 per share on revenues of $17.6 billion for the three months ending in December, with Mohan and his team pegging the two key metrics modestly lower at $3.71 and $17.5 billion respectively.
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“We expect results to be largely in line for F4Q with Street estimates but we believe the quarter will likely see pressure from [the stronger dollar] which will intensify in F1Q25 (but) we are positive on the setup into the Investor Day for IBM, where we expect a bullish update to the mid term model,” Mohan and his team wrote.
In software, Mohan sees IBM’s RedHat, which it purchased for $34 billion in 2019, driving solid revenue gains amid the improving landscape for AI investment spending. That momentum isn’t likely to support growth in consultancy revenues, although a pickup over the second half of this year is likely.
In terms of the mid-term outlook from the Feb. 4 investor day, Mohan is looking for an update on the $6.4 billion takeover of cloud infrastructure specialists HashiCorp., which is being challenged by competition authorities in the United Kingdom, a well as the color on the software and consultancy outlooks.
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“For Consulting, we believe the focus will likely be about further integration with their Gen AI software offering and the outlook for the space given the unclear macro and weak discretionary spending, he added.
The Investor Day event may also touch upon IBM’s role in the nascent quantum computing developments. Earlier this month, Nvidia CEO Jensen Huang said that the quantum could be two decades away from having any practical application.
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“For tech giants like Microsoft, Google, and IBM, quantum computing represents a long-term strategic investment, driven by their extensive resources and vision, rather than short-term market fluctuations,” said Joe Tigay, portfolio manager at the Rational Equity Armor Fund.
“IBM’s quantum efforts are focused on offering quantum computing as a service to enterprises, while Google aims to advance fundamental science and develop fault-tolerant quantum computers,” he added.
IBM shares were marked 0.19% higher in early Friday trading and changing hands at $226.38 each, a move that extends the stock’s six-month gain to around 23%.
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