The Power of AI: IBM's Impressive Quarter

IBM, the 113-year-old computing upstart, showcased the true power of artificial intelligence in its recent fourth-quarter financial results. While the figures slightly exceeded Wall Street estimates, it was the company's exponential growth in AI workloads that stole the spotlight. IBM's "book of business" for AI workloads doubled sequentially in the quarter, reaching approximately $400 million – a substantial increase from the "low hundreds of millions" reported in the previous quarter.

The significance of IBM's success story goes beyond AI. The company's free cash flow is another standout factor. IBM not only surpassed its projected $10.5 billion free cash flow for the year but also exceeded expectations by reaching $11.2 billion. Looking ahead, IBM anticipates a further uptick to $12 billion in free cash flow by 2024 – a remarkable $1 billion above the Street's projection.

In addition to impressive financial results, IBM shared its optimistic revenue outlook for 2024. The company expects to achieve mid single-digit growth, ranging from 4% to 6%, surpassing the Street consensus of 3%. These accomplishments align with IBM's long-term forecast for October 2021, which outlined the company's strategic focus on hybrid cloud and artificial intelligence. IBM's plan included targeting high-single-digit growth in consulting and mid-single-digit growth in software – objectives that are being met with precision.

To further optimize operations, IBM plans to implement cost-cutting measures by reducing its workforce by a few percentage points. This adjustment reflects both the company's own efficiency gains from leveraging AI and its commitment to expanding its pool of AI experts in consulting and software.

IBM's recent successes not only demonstrate the transformative impact of artificial intelligence but also highlight the company's financial prowess and strategic vision. As one of the unsung heroes in the AI sector, IBM has quickly become a promising investment opportunity.

IBM Shares Surge on Strong Quarterly Report

IBM shares experienced a significant surge, rallying almost 13% in recent trading to reach $196.43. If the price holds, it would mark the stock's highest closing level since June 2013. The company is now within 5% of its record closing high of $206.12, achieved on March 15, 2013. Today's rally represents the stock's most substantial one-day move since July 2000 and has contributed over 140 points to the Dow Jones Industrial Average, single-handedly keeping the blue-chip index in positive territory.

While there were a few soft spots in the report, with software revenue falling slightly below street estimates, analysts were generally impressed by the numbers. Of particular note were the strong free-cash-flow results.

BofA Global Research analyst Wamsi Mohan reaffirmed his Buy rating on IBM shares and raised his target price for the stock to $200, up from $170. Mohan highlighted that IBM's 2024 guidance, especially concerning free cash flow, surpassed expectations. This positive outlook reflects a mix of higher profitability and reduced cash requirements for its retirement plans, partly offset by increased capital expenditures. Mohan emphasized that "the turnaround at IBM continues, with a defensive portfolio, attractive dividend yield, and an underappreciated AI portfolio."

Likewise, Melius Research analyst Ben Reitzes, who also holds a Buy rating on IBM shares, set a target price of $224. He believes that this quarter's success is primarily attributed to the company's strong cash flow performance. Reitzes anticipates further growth for IBM, particularly highlighting that the company's consulting business is outpacing its competitor Accenture. Notably, IBM is currently trading at a 40% discount to Accenture based on a 2024 price/earnings multiple basis.

Reitzes concludes by acknowledging that investors are beginning to realize that IBM has reinvented its business to drive acceleration through 2025. With mid-single-digit growth and an expanding AI relevance, he believes IBM is positioned to achieve a market multiple.