Here’s why IBM stock is on the move

Key points

• IBM stock rose 6% on Thursday after it beat Q2 earnings estimates.

• The revenue gains were driven by its gen AI capabilities.

• Is IBM stock a buy?

IBM stock was up some 6% Thursday after a solid Q2 earnings report

Big Blue was in the black on Thursday as IBM (NYSE:IBM) stock rose more than 6% after reporting second quarter earnings.

IBM surpassed analysts’ estimates in the quarter, with revenue rising 2% year-over-year to $15.8 billion, topping estimates of 15.6 billion.

Net income jumped 14% year-over-year to $1.8 billion, or $1.99 per share. That fell short of median earnings estimates of $2.18 per share, but when adjusted to exclude acquisition and other costs, IBM beat estimates with adjusted earnings of $2.43 per share, beating $2.20 per share estimates.

With Thursday’s gains, IBM stock is up about 20% year-to-date (YTD).

Gen AI drives earnings

IBM generated most of its income from its software business, which saw revenue rise 7.1% in the quarter to $6.7 billion. Consulting revenue was down 1% to $5.2 billion, while infrastructure revenue ticked up 1% to $3.9 billion.

AI has been driving earnings across the business, IBM Chairman and CEO Arvind Krishna said on the earnings call with analysts, particularly its watsonx platform.

Launched just one year ago, watsonx is a generative AI platform that essentially allows business clients to train and fine-tune their own AI models.

“We continue to see that clients turn to IBM for our technology and our expertise in enterprise AI, and our book of business for generative AI has grown to more than two billion dollars since the launch of watsonx one year ago,” Arvind Krishna, IBM chairman and CEO, said.

The firm was also able to boost its free cash flow to $2.6 billion in the quarter, up from $2.1 billion the same quarter a year ago. Through the first six months of the year, IBM has amassed $4.5 billion in free cash flow, $1.1 billion higher than the first half of 2023.

Further, its gross profit margin rose to 56.8%, up from 54.9% in the same quarter a year ago, while its operating margin is 14.1%, up 110 basis points year-over-year.

“Our strong cash generation enables us to continue investing in innovation and expertise across the portfolio while returning value to shareholders through dividends,” James Kavanaugh, IBM senior vice president and chief financial officer, said.

IBM raises outlook for free cash flow

IBM has one of the best dividends on the market, and the influx of free cash flow should help it sustain it. Currently, IBM pays out $1.67 per share at a yield of 3.63%. It has increased its annual dividend every year for the past 24 straight years.

For the full year, IBM maintained its growth projections, calling for mid-single-digit revenue growth. However, it raised its operating margin guidance by half a point and increased its estimate for free cash flow to $12 billion.

IBM’s strong second quarter results led several Wall Street analysts to raise the stock’s price target, including Stifel, BMO Capital, Jefferies, JPMorgan Chase, and RBC Capital.

Still, modest growth is expected, as Stifel, for example, raised it to $205, which is only 6% higher than its current $193 per share price. JPMorgan only raised it to $195, which is slightly higher than the current price.  

Is IBM stock a buy?

IBM stock is one to put on your radar for a few reasons. First, it is relatively cheap, with a P/E of 20 and a forward P/E of 18.

Second, its rapid growth in its generative AI platform is encouraging, with its book of business growing to $2 billion in just a year, across its various segments. Its specialty in AI training is a potentially lucrative niche, as more and more companies use AI and need their models to be trustworthy and reliable.

Finally, its free cash flow is impressive, as it will allow it to maintain its already great dividend and invest in its business and technology.

IBM stock is up 20% already YTD, so it is uncertain how much more it will rise in the near term. But as a dividend stock its worth a buy, and as a long term hold it is a solid option.