AI Demand: IBM Shares Rises by 13%, Revenue by 4%

IBM shares jumped nearly 13% to a more than 10-year high on Thursday after the company reported a better-than-expected revenue outlook backed by strong demand for its artificial intelligence services.

Orders from IBM’s generative AI business, which includes bookings and sales from services such as those powered by its Watsonx AI platform, doubled in the fourth quarter and are expected to help its revenue grow by around 4-6% in 2024, the company reported late on Wednesday.

Consulting firms and software companies, including Germany’s SAP, account for much of IBM’s AI-related bookings, IBM chief financial officer James Kavanaugh said in an interview.

IBM shares rose to a peak of US$196.89, their highest since June 2013, adding about $20-billion to the company’s market capitalisation.

“We’re seeing very good increased demand overall” for generative AI offerings, IBM CFO James Kavanaugh said in an interview with Yahoo Finance. “We’ve got thousands of clients we’re having interactions with. Our use cases and pilots are up about fivefold.”

IBM earnings per share of $3.87 beat the $3.76 average of Wall Street estimates, and revenue of $17.4 billion topped the $17.29 billion forecast for the fourth quarter.

Of particular interest to analysts and investors is the company’s free cash flow, which IBM predicted will rise to about $12 billion this year from $11.2 billion in 2023. Revenue will rise by a mid-single-digit percentage, with software trending slightly above that and consulting expected to expand 6% to 8%, Kavanaugh said.

At least eight Wall Street analysts, including from Bank of America, JPMorgan, Jefferies and Evercore, raised their price targets for IBM’s stock following the announcement.

The median price target of the 20 analysts covering IBM is $144.50, unchanged from a month ago, and their average recommendation is “hold”, according to LSEG data.

IBM’s stock is currently trading at about 17x its next 12-month’s expected earnings versus its two-year historical average of about 14x, while its peers were trading at about 20x, according to LSEG data.

In an investor note, JPMorgan analysts led by Brian Essex raised their price target to $190 from $170.

“We don’t think IBM has seen the valuation benefit that some technology peers have from AI, as recent multiple expansion has trended generally below the primary comparisons we look to for valuation,” they said.