Investing.com -- Morgan Stanley analysts believe IBM (NYSE:IBM)'s recent stock momentum is likely to persist through the upcoming earnings season.
Despite maintaining an Equal-Weight rating on the stock, the firm highlights several bullish drivers that have propelled IBM to outperform the S&P 500 by 20 percentage points since its second-quarter earnings on July 24.
In a note to clients, Morgan Stanley (NYSE:MS) said, "We don't see much that is likely to derail IBM's momentum at 3Q earnings."
They expect the company's third-quarter results and fourth-quarter guidance to meet or even slightly exceed Street estimates, providing further support for the stock.
IBM's valuation reached all-time highs, with the stock now trading "in-line with the market" for the first time in over a decade.
Analysts attribute this performance to three key factors: optimism around growth acceleration in 2025 driven by ELA and mainframe cycles along with the HCP acquisition, the company's potential as a beneficiary of AI, and expectations that IBM's Red Hat division will capitalize on market volatility at VMware (NYSE:VMW).
Morgan Stanley remains optimistic about IBM's trajectory despite risks, including the deceleration of Red Hat, which could pose a challenge in the third quarter.
"For now, remain EW," they wrote, pointing out that their 3Q24 revenue and EPS estimates are 1-3% above consensus, thanks to slight upside in software sales, the closing of the QRadar asset sale, and reduced foreign exchange headwinds.
The analysts set a new price target of $217 on the stock, up from $182, implying a potential downside of 7%.
However, they expect IBM to "trade between our base and bull cases in the near-term" through the end of the year. "We remain EW-rated as [we] don't expect 3Q earnings to be a negative catalyst," they concluded, reinforcing the view that IBM's stock will maintain its momentum.