Shares of the veteran tech giant are near an all-time high.
Venerable tech conglomerate International Business Machines (IBM 2.48%) is experiencing a banner year. Its stock is up nearly 60% over the past 12 months, and it hit an all-time high of $227.67 on Oct. 7.
Big Blue’s share price rose to new heights thanks to a confluence of factors. Its focus on artificial intelligence and cloud computing is producing revenue growth. This, in turn, ignited Wall Street’s confidence in the tech titan’s future.
For instance, analyst Amit Daryanani, of investment banking firm Evercore ISI, raised his price target for IBM from $215 to $240 in September. Another boost to its stock came when the Federal Reserve cut interest rates.
Is IBM’s success a sign to snatch up shares before they rise higher? Answering that question requires taking a look at the company to understand how Big Blue is doing today, and the factors that may make it a worthwhile long-term investment.
IBM’s business performance
When Big Blue’s CEO Arvind Krishna took over the top spot in 2020, he focused the company around AI and the cloud. The strategy is paying off with AI demand exploding over the past year.
The company’s software division, which encompasses its cloud and AI sales, generated $6.7 billion in second-quarter revenue, up 7% year over year. This part of its business represented 43% of its $15.8 billion in Q2 revenue.
IBM’s new AI platform, called watsonx, launched in 2023. Since then, IBM’s generative AI business has grown by more than $2 billion.
Big Blue continues to evolve its AI and cloud solutions. For example, IBM is acquiring cloud automation provider HashiCorp, with the deal expected to close by the end of this year.
HashiCorp’s technology automates cloud tasks for customers, streamlining an IT environment that’s growing increasingly complex due to the advent of AI. The acquisition should boost IBM’s sales in 2025. HashiCorp’s revenue was $165.1 million in its fiscal Q2, ended July 31, representing 15% year-over-year growth.
However, its consulting division, a key revenue-generating area of Big Blue’s business, was down 1% year over year to $5.2 billion in Q2. IBM management noted that the decline was due to macroeconomic factors slowing customer spending on consulting services. The company sees its consulting arm prospering over the long run, noting that its consultants “are critical in helping clients build their AI strategies from the ground up.”
IBM’s infrastructure business, centering around hardware sales such as its z16 mainframe computers, is the other major revenue-contributing division. This segment produced Q2 sales of $3.6 billion, up 1% year over year. The z16 is over two years old, yet it’s outselling previous models at this stage, thanks to its embedded AI features.
IBM’s financial strength
Big Blue’s sales helped it grow Q2 free cash flow (FCF) to $2.6 billion, up from $2.1 billion in 2023. The company expects its full-year 2024 FCF to exceed $12 billion. That’s a substantial increase from 2023’s $11.2 billion.
IBM’s strong FCF is another factor boosting its share price. FCF is critical because it indicates the cash available for Big Blue to invest in its business, reduce debt, fund share repurchases, and pay dividends.
The dividend is one of the big benefits of owning this stock. Its dividend yield is a beefy 2.9%, and the company has an impressive 29-year streak of consecutive dividend increases. It’s paid dividends since 1916, making IBM stock a stable source of passive income.
Big Blue’s balance sheet is in decent shape. Exiting Q2, total assets stood at $133.8 billion, with $12.2 billion of that in cash and equivalents. Its Q2 total liabilities were $109.7 billion, including $56.5 billion in debt.
To buy or not to buy IBM stock
IBM is a good stock to own, given its combination of revenue growth and history of dividend increases. For these reasons, and its more than 100 years in business, Big Blue is a reliable stock for a retirement account, such as an IRA.
The challenge to buying shares, however, is its current stock price, because it’s hovering near an all-time high. Before this year, the last time IBM shares reached a record high was 2013.
Of course, shares could go higher, as Daryanani proposes, but the consensus among Wall Street analysts is a “hold” rating with a median price target of $207 for IBM stock. This suggests a belief that the current share price is elevated.
Consequently, the ideal approach may be to keep an eye on IBM, and wait for its share price to drop before scooping up this dependable dividend stock in the AI space.