IBM Stock Surges Following Rare Outperform Rating by Equity Analyst

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IBM 's stock (NYSE:IBM) experienced a significant surge on Wednesday, peaking at a 3.7% increase before settling at a 2.8% gain by 1:05 p.m. ET. The rise in the stock value is attributed to an outperform rating assigned by Matthew Swanson, an analyst from RBC Capital, marking a shift in the company's outlook.

Swanson recently set a $188 price target for IBM, the highest target set for the company on Wall Street. He believes that IBM's software and consulting services are underappreciated and stand to benefit from post-pandemic trends in cloud computing and artificial intelligence (AI), which are complicating IT environments.

This optimistic view on IBM comes after several strategic moves by the company, including the acquisition of Red Hat, an open-source software titan, in 2019 and the appointment of Arvind Krishna as CEO in 2020. These changes have contributed to altering the once gloomy outlook on IBM, primarily due to disruption caused by Silicon Valley cloud firms.

Despite experiencing a slight dip of 0.4% in revenue last quarter due to a cyclical downturn in its hardware and infrastructure sectors, IBM's software division expanded by 7.5% on a constant currency basis. This growth was driven by Red Hat's growth of 11%, along with a 10% rise in data and AI products, and a 5.3% increase in the consulting segment.

The acquisition of Red Hat has proven to be a strategic move for IBM. It helps businesses manage complex IT environments that involve public clouds, private clouds, and on-premises computing with intricate computing and governance rules.

IBM has also shown aggressive investment behavior in AI this year, with seven hybrid cloud and AI acquisitions completed in 2023 alone. In May, IBM unveiled the Watsonx platform in partnership with the open-source AI start-up Hugging Face. This platform provides a range of services for generative AI, data storage, and data governance across multiple clouds.

Despite a history of stagnant financial performance, IBM is gradually gaining investor confidence. As Silicon Valley giants focus on developing proprietary solutions within their own clouds, IBM could potentially establish a robust business assisting enterprises in managing complexity and working with multi-cloud environments.

Currently, IBM's stock offers a 4.5% yield, making it an attractive option for investors seeking dividends. Moreover, the company's software franchise appears to be in a stronger position now than in previous years. However, the success of its Watsonx platform remains to be seen due to stiff competition in the AI sector.

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