“Big Blue is so back.”
Amit Daryanani, an Evercore ISI analyst, is commenting on the most recent earnings of International Business Machines Corp. (IBM). With its shares topping gainers on the S&P 500 SPX and Dow Jones Industrial Average DJIA and heading for their best day ever, the company’s remarks had Wall Street buzzing.
Why such a positive outlook? The outlook on consulting has significantly improved.
“We think the print highlighted IBM’s unique position across both software and consulting segments that are starting to inflect higher with [artificial intelligence] and potential [mergers and acquisitions] being incremental upside catalysts,” Daryanani stated.
In the most recent quarter, software sales increased 11.5% on a currency-neutral basis, indicating a “sustained acceleration,” according to Daryanani. Despite a 1% decline in consultancy revenue, IBM anticipates stronger momentum this year since it has $5 billion in AI signings that could result in sales.
In the afternoon, IBM’s stock has increased by 12.5%. That puts it on pace to make its biggest one-day gain since July 20, 2000, when it increased 13%.
After currency changes, IBM is now aiming for at least 5% growth in 2025, despite the company’s revenue only increasing by 1% last year. The consultancy firm is contributing to such optimistic forecasts, according to Ben Reitzes of Melius Research.
“Moving this segment from a headwind to a tailwind, along with a pick-up in the infrastructure segment from the mainframe cycle starting mid-year, did the trick, enabling IBM to endorse 5%-plus constant currency revenue growth overall for 2025,” he stated. “For long-time IBM watchers like us, this kind of growth is quite rare.”
And from there, the growth might improve. Will that kind of route map be outlined during the analyst day next week?
“We think we saw the ingredients here to endorse a business model that can accelerate from 5%+ growth toward 7% growth within a few years as the mix shift toward Red Hat and other Software (like Hashi Corp and automation) continues,” Reitzes stated.
IBM’s stock momentum, according to Erik Woodring of Morgan Stanley, makes it “clear the market believes [management’s] guide for 2025 is conservative, and there are areas of the guide where we could make that case.” Organic software growth, for example, may surpass the forecasted 4% growth rate.
“There’s also the possibility that the market believes IBM is upticking on future M&A intentions (we agree), which could also drive upside to [2025] estimates,” he stated. “Either way, we now believe it’s incumbent upon the bears to make a case for why momentum doesn’t sustain beyond next week’s analyst day.”
