IBM is scheduled to report their Q4 ’24 quarterly earnings after the close of business on Wednesday, January 29th, 2025.
Sell-side consensus is expecting $3.75 in earnings per share on $17.45 billion in revenue for an expected y-o-y decline of 3% in EPS on flat or zero revenue growth y-o-y. The former mainframe giant is also expecting $4.29 bl in operating income, which would actually be 14% y-o-y growth for that key metric, which was somewhat surprising to read, and the math was verified.
IBM, like Oracle are both very sensitive to US dollar strength and weakness, more so than many tech companies, so expect to see a “constant currency” impact with Q4 ’24.
Last quarter, Q3 ’24, IBM grew revenue, operating income and EPS +1%, +15% and +5% respectively, as software beat, while the consulting business missed. The AI book in q3 ’24, grew to a $3 billion run rate, from a $2 billion run rate in Q2 ’24. That growth in the AI bool run rate seem to get investors attention last quarter, but it’s still a small part of IBM’s revenue and maybe that’s a plus with the “deepseek” worries that took down the Nasdaq 3% on Monday, January 27th, 2025.
For Q1 ’25, the street consensus is looking for $1.56 in EPS, $14.6 billion in revenue and $2 billion in operating income for expected y-o-y growth of -7%, +1% and +23% growth in operating income.
For full-year 2025 as it stand currently, IBM is expecting 5% EPS growth on 4% revenue growth.
The tough part of being long IBM is trying to figure out what the business might look like in the next 5 years. IBM, Cisco and even Intel tried their hand in the software business, to no avail, but Arvind Krishna, may just be seeing some progress with software and “cognitive solutions” which is what Watson has been folded into and seems very close to the AI we hear about in the mainstream financial media, and is now 44% of the business.
Valuation:
IBM – if the Q4 ’24 estimates are met – will have grown EPS and revenue +6% and +1% in calendar 2024, while the stock is trading at 22x those estimated forward earnings.
IBM looks a little more attractive on a cash-flow basis, where IBM has earned – on a trailing-twelve-month basis – $15.29 in cash-flow per share and $14.40 in free-cash-flow (FCF) per share. On those metrics IBM is trading at 13x and 14x, on a TTM basis, not to mention, the afore-mentioned 7% free-cash-flow yield.
Capital return has been below-average (seemingly) as IBM, formerly a prodigious share repurchaser, has not repurchased any material amount of shares since way back in March, 2019. Since that quarter, share repurchases have been absent.
Maybe Arvind and the Board are against the prior share repurchase strategies, or maybe maybe IBM wants to wait and see if it has a concrete path forward in terms of it’s business model to return to mid-to-high single digit revenue and EPS growth. Maybe they aren’t sure yet what IBM will look like in 5 years.
The real progress IBM has made and the real reason IBM is showing stronger free-cash-flow growth, is that “capex” has been reduced substantially the last 5 years: Here’s a quick metric from the valuation spreadsheet on IBM’s capex trends:
- 4-qtr average: $1.167 bl (TTM as of 9/30/24)
- 12-qtr average: $1.64 bl
- 20-qtr-average: $1.96 bl
That’s pretty impressive: IBM has reduced it’s capex from almost a $2 bl run rate over the last 20 quarters, to just over $1 billion as of the last 4 quarters. Whether IBM is cutting bone or trimming fat is to be determined.
This blog includes acquisitions in capex typically, with the logic being that if an acquisition can’t contribute to free-cash-flow, it was grossly overvalued, or management couldn’t extract value from the deal.
The 3% dividend yield is a plus, although – as a rule – this blog doesn’t typically buy individual stocks for a dividend yield or for income.
The next three years i.e. calendar years 2025 – 2027, the “average” EPS and revenue growth for IBM is expected at 4% and 5% respectively.
Readers can chalk up the low EPS growth to the higher fully diluted share count at IBM since there haven’t been any share repurchases: when IBM last repo’ed that $920 million in March, 2019, the fully diluted share count that quarter was 890.8 million, while the f/d share count as of Sept ’24 was 923.6 million or a 3% increase. Shareholders are being diluted, although maybe not egregiously, but still…
A renewal of buyback announcements would be nice.
Technical analysis:
The big technical plus for IBM was that after peaking at an all-time-high of $215 in April ’13, just as the SP 500 was breaking out to a 13-year high, the stock remain mired in this decade long trading range from $215 down to the pandemic low near $100, but the stock has now broken out above that April ’13 high of $215 as of Q4 ’24, and is trading between that 2013 all-time-high and the high $230’s.
Be warned though, Morningstar remains negative on the stock, with an eroding moat, and an intrinsic or fair value of $139 per share or $90 lower than today’s price.
Morningstar’s latest write-up says that “the age of IT interoperability continues to take a toll on IBM’s economic moat”.
Summary / conclusion:
The breakout above the April – May, 2013 high of $215 and the fact that the stock remains there is a plus (for me) right now as an investor, as do the slowly increasing EPS growth rates (i.e. positive revisions). The stock isn’t a top 10 position, but I like it’s “non-correlation” to the Mag 10 and the rest of the tech space, and the fact forward EPS and estimates for the next three years are expecting just reasonable growth.
Compare Mag 7 or Mag 10 or AI expectations today and for the last few years, as IBM has slowly tried to re-engineer the business.
IBM’s been all-but-forgotten and maybe for good reason.
Investors should be wary too, that this 4th quarter every year is typically IBM’s strongest, and the first quarter of every year is typically the weakest. Note the above consensus estimates in the top half of this preview.
Clients are long an approximate 1.5% position in IBM as the 4th quarter earnings report approaches.
A trade below $195 wouldn’t be a positive.
None of this is advice or a recommendation, but only an opinion. Past performance is no guarantee of future results. Investing can and does involve the loss of principal even for short periods of time. All EPS and revenue estimates or EPS and revenue growth estimates are taken from LSEG estimate data. None of this information may be updated, and if updated may not be updated in a timely fashion.
Thanks for reading.