The IBM booth at the CeBIT 2017 trade fair in Hannover, Germany, on March 22, 2017.

International Business Machines  (IBM) – Get Free Report shares edged higher Wednesday ahead of the group’s fourth-quarter earnings, slated for after the close of trading, as investors look to a new AI outlook from the old-school tech icon.

IBM has perhaps the longest association with AI and related technologies on Wall Street, from its early investments in machine-learning in the 1950s to its famous Deep Blue supercomputer that beat chess champion Garry Kasparov in 1997 and the nascent version of Watson that won a televised round of the quiz show “Jeopardy!” in 2011.

The Armonk, N.Y., tech giant, once-famous for its ubiquitous mainframe computers that dominated the business landscape, is now focused on software and consulting sales in a fragmented tech world where everyone is racing for a piece of the new AI-focused market. 

And while the group doesn’t have the reputation – or for that matter, anywhere near the market value – of tech giants such as Microsoft, Google and Nvidia, it’s nonetheless quietly establishing itself as worthy of a seat at the global AI table. 

IBM’s flagship AI platform, known as Watsonx, remains one of the market’s most-affordable ways for businesses to build, deploy and maintain their AI solutions. 

The platform can be used in the medical space, where Watson Oncology can use large-language models to study patient data and suggest treatments, or as a standard client relationship tool in the consultancy sector. 

“We are helping clients understand how AI can be used to automate tasks, make better decisions with speed, and improve customer experiences,” chief financial officer Jim Kavanaugh told investors on a conference call in October. 

“We’re providing clients with the opportunity to accelerate their transformation and deploy generative AI responsibly, whether that be leveraging AI capabilities of IBM, our partners, or a combination,” he added.

The new IBM: Apptio and more

Last year, IBM paid around $4.6 billion for Apptio, the Bellevue, Wash., tech platform owned by Vista Equity Partners that helps companies manage their cloud, IT and AI spending. 

The deal added to a host of transformational moves at IBM over the past five years, including the $34 billion purchase of cloud software group Red Hat in 2019 and the spinoff of its legacy infrastructure and data-center business in 2022.

Last month, the group also unveiled a $2.4 billion deal to buy two integration platforms from Germany’s Software AG as it looked to add further value to its AI and hybrid cloud offerings.

IBM’s slimmed-down divisions now include three reporting groups: software and consulting, which comprise around three quarters of its overall revenue, and a smaller computer infrastructure unit.

Last fall, IBM generated $14.8 billion in overall sales, a 4.6% improvement from the same period in 2022, while producing a bottom line of $1.71 billion, or $2.20 a share adjusted, and a gross-profit margin of around 54.4%.

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For the three months ended in December, analysts estimate IBM’s revenue rose 3.6% from 2022 levels to around $17.3 billion, with adjusted earnings of $3.78 a share. 

Analysts to focus on revenue growth

Analysts will likely focus on revenue-growth rates in IBM’s consultancy division, which Bank of America sees rising by between $1 billion and $2 billion over each of the next two years, as well as the AI-demand impact on Red Hat.

Stifel’s David Grossman sees 2024 earnings in the region of $10.10 per share, well ahead of Wall Street’s $9.81 consensus. 

The analyst also boosted his price target on IBM by 27%, to $188 a share, while keeping his buy rating in place ahead of today’s earnings report.

Headwinds to the group’s 2024 outlook, which will be closely tracked by Wall Street, could come from a stronger U.S. dollar, given that IBM generates a significant portion of its revenue from overseas markets.

Another factor that could generate interest from IBM’s conference call is any commentary linked to its Quantum System Two quantum computer, an incomprehensively powerful machine it unveiled to the public last month. 

Tech experts say quantum computing will ultimately solve many of AI’s current shortfalls – including speed, expense and fallibility – and an IBM-lead breakthrough could transform its place in the AI infrastructure market. 

IBM set for more gains – and stock is cheap

IBM shares were marked 0.25% higher in early Wednesday trading to change hands at $174.35 each, a move that would nudge the stock’s six-month gain to around 25% and peg it at the highest levels in more than six years. 

IBM also trades with a price-to-earnings multiple of around 23, just ahead of the forward PE multiple for the S&P 500 and less than half the 50 times average tied to the so-called Magnificent 7 tech giants.

IBM is “an overlooked beneficiary of increasing AI adoption,” analysts at Evercore ISI argued last week after they boosted their rating on the stock to outperform with a $200 price target.

The stock is “well positioned to benefit from a host of tailwinds in [calendar year 2024] and beyond,” Evercore said, thanks in part to “enterprise IT spend improving to drive productivity and AI centric tailwinds that could drive upside to consulting and software segments over time.”

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