International Business Machines shares soared to a fresh record high in Thursday trading after a better-than-expected fourth-quarter earnings report underscored the legacy software icon’s place in the emerging AI-investment story.
IBM (IBM) posted only a modest Q4 revenue gain — around 1% — leading to a top-line tally of $17.55 billion. But it posted an 11% jump in software sales, the biggest in five years.
The group also said its AI-related backlog surged by $2 billion from the third quarter to $5 billion amid the acceleration in IT spending tied to the new technology race.
“We continue to see clients reprioritizing their IT spending towards digital transformation and AI initiatives for cost optimization and operational efficiency as we wrap on a strong above-market performance in 2023,” finance chief James Kavanaugh told investors on a conference call late Wednesday.
“Generative AI contributed about $1.5 billion of new bookings in the quarter as clients see the value our extensive industry and enterprise AI expertise can bring to accelerating their digital transformations,” he added.
IBM CEO Arvind Krishna said DeepSeek’s emergence has been a ‘point of validation’ for open-source AI technology.
The gains, of course, were set against the backdrop of China-based DeepSeek, which claims to have developed an AI agent for a fraction of current costs, with in some cases superior performance.
The introduction of DeepSeek triggered angst about the size and scope of AI-investment spending from some of the world’s biggest tech companies.
DeepSeek a ‘point of validation’ for tech
IBM CEO Arvind Krishna said DeepSeek’s advances were a “point of validation” for the use of open-sourced models such as Granite, which the group launched last year.
“We have been very vocal for about a year that smaller models and more reasonable training times are going to be essential for enterprise deployment of large language models,’ Krishna said.
“We have been down that journey ourselves for more than a year. We see as much as 30 times reduction in inference costs using these approaches,” he added.
“As other people begin to follow that route, we think that this is incredibly good for our enterprise clients. And we will certainly take advantage of that in our business.”
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That said, IBM sees revenue growing around 5% this year, without taking accounting for the impact of a stronger U.S. dollar. And it expects to generate around $13.5 billion in free cash flow.
“IBM is gaining some traction with AI, but it is still a very small piece of the business,” said Logan Purk, technology analyst for Edward Jones. “Management maintained an optimistic tone, which we agree with, but we also believe it will take time to fully materialize.”
Software budgets ‘the last’ to be cut
“Many companies are limiting discretionary spending, which is a headwind to growth,” added Purk, who carries a hold rating on the stock.
“Our main concern is that even with software showing accelerated growth, overall company sales are still only 3%, which is below their mid-single-digit target. Further, costs continue to outpace sales growth, hurting profitability.”
Evercore ISI analyst Amit Daryanani lifted his price target by $35 to $275 a share, while Bank of America’s Wamsi Mohan added $10 to take his to $270 a share.
Goldman Sachs analyst James Schneider added $25 to his IBM price target following last night’s earnings report, taking it to $275 a share.
Krishna, for his part, rounded out last night’s conference call with a bullish outlook.
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“I did spend last week in Davos where you get to meet a few hundred of your colleagues from around the world,” he said. “I would tell you there is more optimism in the business climate and there is more optimism on the growth that is possible in ’25 compared to ’24. And we know all the reasons for that.”
“I think to a person, the budget that they will touch last, if there is ever an issue, is their software budget,” he added. “So that is what is giving us confidence.”
IBM shares were last marked 12.6% higher in recent trading and changing hands at $258.90, pegging the group’s market value at just under $240 billion.
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