Should Investors Buy IBM Stock for its Quantum Potential?
IBM — International Business Machines Corporation — (IBM) stock has surged in 2024, outpacing the rest of the market and beating many of its sector peers. Investors appear buoyed by the company’s potential in artificial intelligence (AI), but this “potential” isn’t currently reflected in earnings forecasts. Quantum computing represents another area of great potential, and one where IBM has invested heavily. However, I feel it’s too early to invest in IBM for quantum potential, especially given the stock’s valuation. I’m neutral on this rather expensive stock.
IBM, founded in 1911, is a multinational technology corporation headquartered in Armonk, New York. Its positioning in the information technology segment predates pretty much all of its big tech peers, showcasing decades of leadership in hardware and enterprise solutions.
In light of this history, the company’s stock has risen significantly over the past 12 months—over 70% at the time of writing—largely fueled by excitement around artificial intelligence (AI), as investors have ploughed into stocks with exposure or potential exposure to AI.
However, IBM’s performance had broadly impressed investors until the Q3 results released on October 23. For example, IBM’s recurring revenue, represented by an Annual Recurring Revenue (ARR) of $14.1 billion, grew by 9% year-over-year in Q2, outpacing overall revenue growth of 4%. Meanwhile, the company’s software segment saw an 8% increase in revenue to $6.7 billion, indicating potential for future growth as it becomes a larger part of overall sales.
Moreover, these prospects are compounded by the hybrid cloud market, which is expected to grow significantly, with a compound annual growth rate of 12.4% from 2025 to 2033. Yet, despite these positive indicators, IBM’s stock surge appears more driven by AI hype than by substantial changes in its fundamental business performance.
Personally, I’m concerned that IBM’s exposure to AI might be overstated. While IBM has reported growth in its generative AI business, with a book of business reaching over $2 billion since the launch of watsonx, this figure is small compared to its total trailing twelve-month revenue of $62.36 billion. The company’s AI-related revenues represent a fraction of its overall business.
Moreover, revenue growth certainly isn’t groundbreaking. The 9% ARR year-over-year growth in Q2 was followed by just 1% growth in total revenue in Q3. This suggests that IBM is not yet positioned as a true software-centric company that could justify a higher valuation based solely on AI capabilities.
Leave a Reply