International Business Machines (IBM) is setting its sights on becoming a frontrunner in the field of artificial intelligence (AI) as it enters the new year. Despite reaching its highest stock levels since 2017, recent ratings from Wall Street analysts indicate that IBM still has work to do in order to win over the market.
IBM’s strategic positioning within the generative AI trend has contributed to the surge in stock prices. The company’s introduction of Watson X, a software platform for developing enterprise AI models and applications, has been greatly praised by Wall Street. Unlike other tech giants such as Microsoft and Google-parent Alphabet, IBM has chosen to focus on being a reliable partner for businesses seeking a secure and experimental approach to AI rather than developing consumer-facing applications like chatbots.
Brent Thill, an analyst at Jefferies, noted that while IBM’s stock shows promise, its software business growth rate continues to lag behind that of its competitors, resulting in lower profit margins. Thill does not believe that AI alone will be sufficient to reverse this trend in the near future.
In a research note, Thill initiated coverage of IBM with a Hold rating and set a target price of $180. This target price is based on a price-to-earnings multiple of 17 times IBM’s projected earnings for 2025.
Analyst Lowers Rating on IBM Stock due to Valuation Concerns
Société Générale analyst Richard Nguyen has downgraded IBM stock from Hold to Sell, according to FactSet. This decision appears to be based on valuation, as Nguyen’s price target remains at $143.
IBM stock experienced a 0.9% decline to $159.42 during early trading on Friday. While the stock is near its multiyear highs, its 11% rise over the past year significantly lags behind the gains of Microsoft and Alphabet. Additionally, IBM’s consulting peer Accenture saw a 26% increase in its shares during the same period. In comparison, the S&P 500 has risen by 21% in the past year.
“We prefer to remain on the sidelines given we have limited visibility on the near-term accelerants and haven’t seen signs of an inflection yet,” wrote Jefferies’ Thill.
Thill acknowledges IBM’s efforts in narrowing its focus to software and consulting businesses, including the spinoff of IT managed-services business Kyndryl in 2021. However, he warns that the stock may face challenges in achieving higher earnings multiples if its growth is predominantly driven by the lower-margin consulting business.
“We see a significant near-term AI opportunity in IBM’s strategic consulting arm, considering that most customers are still in the early stages of their Gen AI strategies and will require assistance on effectively implementing these technologies,” Thill added.