On Thursday, Stifel, a financial services company, raised its price target for IBM (NYSE:IBM) shares to $205 from $190, while maintaining a "Buy" rating on the stock.
This adjustment comes after IBM reported a solid first-quarter performance with organic revenue growing by 3% and earnings per share (EPS) increasing by 12%, surpassing the consensus expectations.
IBM's mainframe software and improved margins were highlighted as the primary contributors to this performance, attributed to a favorable mix of software sales and cost optimization efforts. The company's 2024 revenue guidance was maintained at around 4%, which aligns with the market consensus.
However, IBM's margin and free cash flow (FCF) growth forecasts have been modestly increased, with at least a 7% year-over-year rise in FCF, reflecting the ongoing cost optimization and mix benefits.
The mainframe software, which accounts for 30% of the software segment and 12% of IBM's total revenue, was particularly positive for revenue growth and margin. On the other hand, the consulting division, representing 33% of revenue, did not meet expectations and its guidance was revised downward due to previously overly optimistic projections and cyclical challenges.
The infrastructure segment, which makes up 23% of revenue, exceeded expectations and saw a modest revenue increase, although the impact of product cycle dynamics makes the results more difficult to interpret.
In terms of macroeconomic commentary, IBM noted that discretionary spending remains soft, with a focus on cost reduction, while large transformational deals continue to progress, albeit at a slower pace.
AI-related bookings nearly doubled quarter-over-quarter to approximately $2 billion, with services making up 75% of this segment. This increase is seen as more indicative of IBM's momentum rather than an immediate impact on revenue.
The report concluded that while the quarter was solid, it may not serve as a catalyst on its own. The larger influence is expected to come from the market recognizing IBM's potential for growth in 2025.
This includes anticipated improvements in software growth from Red Hat, the Enterprise License Agreement (ELA) cycle, and the acquisition of HashiCorp (NASDAQ:HCP), as well as from the mainframe cycle and a stabilization in the consulting business's fundamentals. The new price target of $205 is based on 17 times the estimated 2025 unlevered free cash flow (UFCF).
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