Considering an IBM share purchase before Jan. 29?
IBM, trading close to its all-time high, is set to unveil its fourth-quarter results after market closure on January 29th. The tech giant has soared an impressive 65% over the past three years, finding its footing after a decade-long transformation process. With a focus on hybrid-cloud and AI platforms, IBM has shed its low-growth division, promising a brighter future.
Given the share's proximity to its all-time high, the question arises: should investors hop on the IBM bandwagon now or wait for the earnings dust to settle?
Long-Term Investors: Timing is Irrelevant
IBM's performance post-earnings report could swing in any direction — a missed target, a lackluster forecast, or diminished AI-related bookings could send shares plummeting. Conversely, an optimistic outlook could spark a rally.
As a patient investor, attempting to time the market is generally a futile endeavor. Withholding your investment for years wouldn't significantly impact your decision, given that the short-term fluctuations driven by quarterly earnings reports tend to be inconsequential in the grand scheme of things.
Case for IBM: A Solid Pick
IBM's turnaround and forthcoming potential make a compelling case for the stock — whether you choose to purchase it before or after the Q4 report. After navigating a decade of transformation, IBM is finally reaping the rewards. With its unique blend of software platforms and consulting services, the company's future looks undeniably brighter than its past.
IBM's Q3 earnings were a mixed bag. Software revenue soared by 10% year-on-year, with a solid 9% transaction processing growth and a 14% surge in its Red Hat portfolio. However, its consulting segment stagnated, despite the abundance of digital transformation projects. Client spend is tight in other areas, causing some strain.
IBM's consulting division is integral to its growth strategy — nowhere more evident than in AI. As of Q3, IBM has sealed over $3 billion in generative AI-related business. Watsonx.ai serves as the backbone of its generative AI efforts; however, around 80% of those bookings stem from consulting agreements. This strategy allows IBM to capitalize on the AI implementation demand, while simultaneously marketing their AI software products.
Value at a Reasonable Cost
IBM's anticipated $12 billion in free cash flow for 2024 makes the stock a relatively affordable buy. Based on the current market cap, IBM is trading at 17 times this free-cash-flow outlook. This isn't an exorbitant price tag, considering IBM's vast enterprise client base — many of whom have decades-long relationships with the company.
The company's 2025 free-cash-flow guidance is crucial to the stock's post-Q4 performance. IBM should surpass free-cash-flow growth in 2024. Still, various market and economic factors could impact its results. Nevertheless, even if the market reacts unfavorably to the earnings report, or IBM's guidance falls short of expectations, IBM is still a sound investment for long-term investors.
Given the impressive performance of IBM over the past three years, some investors might consider allocating their finance into the tech giant's shares. However, as a seasoned investor, it's essential to consider the potential impact of IBM's fourth-quarter results on your money.
With IBM's Q3 earnings showing a steady growth in software revenue and the company sealing over $3 billion in generative AI-related business, the long-term prospects of investing in IBM seem promising, offering potentially reasonable returns on your money.
