On Thursday, JPMorgan (NYSE:JPM) updated its stance on IBM (NYSE:IBM) shares, increasing the price target to $190 from $185, while maintaining a Neutral rating. The firm's analyst cited IBM's earnings per share (EPS) beat and upward revision to its fiscal year 2024 free cash flow (FCF) guidance as key factors behind the adjustment.
IBM's recent quarterly results showcased a continuation of robust software growth, notably from its Red Hat and Automation segments, alongside solid non-GAAP earnings and cash flow.
IBM's software performance, particularly the growth of Red Hat, although slightly decelerated this quarter, still supports management's confidence in a potential acceleration later in the year. The company's Transaction Processing and Infrastructure revenues also surpassed expectations.
Despite a slight concern over Red Hat's slower growth, bookings and a six-month remaining performance obligations (RPO) growth in the teens are seen as reassuring signs.
For the remainder of the year, IBM's total revenue guidance remains unchanged, with anticipated growth at the lower end of the previously stated range. However, the company expects a shift in the mix of growth towards the software sector, with consulting growth projected to decline through year-end. The analyst views the increasing strength of IBM's software business as beneficial for the company's overall valuation.
IBM's growing portfolio in the GenAI business, which has reached $2 billion since its inception, is also contributing to the company's positive outlook. The mix of consulting and software services in this area is approximately 75/25.
IBM's approach to utilizing more efficient and cost-effective discrete models aligns well with its platform capabilities. Additionally, the company has raised its FCF guidance for fiscal year 2024 to over $12 billion, up from the previously stated $12 billion.
The firm also noted IBM's positive macro commentary, indicating that technology spending remains strong despite certain factors, such as interest rates, influencing the timing of decisions and discretionary consulting spending.
The anticipated completion of the sale of IBM's QRadar SaaS assets in the third quarter and the expected closure of the HashiCorp (NASDAQ:HCP) deal by year-end were also mentioned as positive developments. With these considerations, JPMorgan has revised its price target to reflect IBM's improved performance and outlook.
In other recent news, IBM has exceeded Q2 2024 expectations, displaying a strong performance largely due to its focus on software and infrastructure, specifically within its hybrid cloud and AI segments.
The company reported a robust revenue of $15.8 billion and operating diluted earnings per share of $2.43. The success of IBM's AI strategy, which includes the open-sourcing of its Granite family of models, has been reflected across all segments.
Notably, IBM's operating gross margin and operating pre-tax margin have expanded, with free cash flow reaching a multi-year high of $4.5 billion for the first half of the year. The company's balance sheet remains robust with $16 billion in cash, and IBM has returned $3.1 billion to shareholders through dividends.
These developments are recent and underscore the company's strong financial health and growth trajectory. IBM's full-year constant-currency revenue growth is projected to align with the mid-single-digit model and free cash flow is expected to exceed $12 billion.
InvestingPro Insights
Following JPMorgan's updated stance on IBM, an analysis of real-time data from InvestingPro provides a deeper insight into the company's financial health and market position. IBM's market capitalization stands at a robust $169.04 billion, reflecting the company's significant presence in the industry. The company trades at a Price/Earnings (P/E) ratio of 20.01, which is aligned with the industry's standards, considering its stable business model and consistent performance. Moreover, IBM's Price/Book ratio as of the last twelve months is 7.27, highlighting a premium valuation that investors are willing to pay for its equity, likely due to IBM's long-standing reputation and solid balance sheet.
IBM's dividend yield is currently an attractive 3.63%, which is particularly noteworthy for income-seeking investors. This is supported by the company's impressive track record of maintaining dividend payments for 54 consecutive years, as highlighted in one of the InvestingPro Tips. Additionally, IBM's stock is known for its low price volatility, providing a sense of stability for long-term investors. With the company's year-to-date price total return at 14.67%, IBM has shown a strong performance in the market, further solidifying its appeal to shareholders.
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