Bank of America revamps IBM stock price after earnings

IBM reported its Q3 earnings on October 22.

During the earnings call, Arvind Krishna, IBM chairman, president, and CEO, said:

"In the third quarter, IBM delivered strong results across revenue, profit, and free cash flow, exceeding our expectations. Revenue growth accelerated to 7%, our highest growth in several years, with all our segments accelerating sequentially. These results underscore the strength of our business model and portfolio, and the innovation we are delivering to clients."

Here are the IBM earnings highlights:

• Revenue of $16.3 billion, up 9% year-over-year (YoY), up 7% at constant currency (CC)
• Gross profit margin of 57.3%, up 1.1 points
• Net income of $1.7 billion compared to a net loss of $330 million in Q3 2024

IBM outlook for fiscal year 2025

• Revenue growth of more than 5% at CC.
• Free cash flow (FCF) of approximately $14 billion.

Despite the company's earnings beating both topline and EPS Wall Street expectations, as well as increasing revenue and FCF guidance for the full year, the stock took a hit in after-market trading.

"This is likely because the cloud business, which is mostly composed of the old Red Hat business, saw growth of 'just' 14%. The firm still ended the quarter with a generative AI backlog of a rough $9.5 billion. I am thinking, from an execution perspective, that this overnight beatdown (-7.8%) may be overdone," Veteran Analyst Stephen Guilfoyle wrote over on TheStreet Pro.

Bank of America raises IBM price target

Following the earnings release, Bank of America analyst Wamsi Mohan and his team updated their opinions on IBM stock.

Analysts noted that Hybrid Cloud (Red Hat) and transaction processing decelerated to +12% year-over-year and down 3% year-over-year in constant currency, respectively, offset by strong contributions from automation (+22% YoY in CC ) and infrastructure (15% YoY in CC).

They said that for Red Hat, IBM management acknowledged the deceleration quarter over quarter and revised their fiscal year 2025 guidance to the "low end of mid-teens" YoY growth.

Related: Analyst resets Intel stock forecast before earnings

The team updated their model for fiscal year 2025, giving an estimate for FCF of $14.0 billion (in line with IBM's guidance). They also raised their forecasts for revenue from $66.6 billion to $67 billion, and EPS from $11.12 to $11.39, driven by upside from higher pre-tax income and Q3 results.

Mohan reiterated a buy rating for IBM stock, and raised the target price from $310 to $315, based on 23 multiple his estimate for the enterprise value to FCF ratio for calendar year 2026.

"Our target multiple for IBM exceeds the high end of the historical range 8-22x, with median 13x. We believe a multiple at the high end/exceeding the historical range is justified given the company's improving growth and FCF trajectory with Red Hat," Mohan wrote.

Downside risks for IBM are:

• Failure to execute on the company's growth roadmap,
• inability to realize expected cost savings from restructuring,
• technology/competitor risk in hardware, software, and services,
• unforeseen currency impacts on revenue and profits,
• acquisition integration, given IBM's acquisitive nature,
• increased concern of economic uncertainty and tightening corporate IT budgets.

Upside risks to our price objective are:

• Faster re-acceleration of topline,
• faster improvement in margins,
• better-than-expected accretion from M&A,
• delivery of upside to FCF.

Recent IBM news

IBM and AMD announced a partnership to deliver AI infrastructure to Zyphra, an open-source AI research and product company.

Under a multi-year agreement between IBM and Zyphra, IBM will deliver a large cluster of AMD Instinct MI300X GPUs on IBM Cloud for Zyphra to use for training frontier multimodal foundation models. The initial deployment was made available to Zyphra in September, with planned expansion in 2026.

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IBM entered into a partnership with Anthropic. Anthropic's Claude will be integrated into select IBM software products, starting with IBM's new AI-first integrated development environment.

The company also teamed up with Groq.

As part of the partnership, Groq and IBM plan to integrate and enhance Red Hat open source vLLM technology with Groq's LPU architecture. IBM Granite models are also planned to be supported on GroqCloud for IBM clients.

"The IBM-Groq partnership marks a major inflection point in AI infrastructure, layering IBM's enterprise reach and its potent WatsonX ecosystem with Groq's ultra-fast inference hardware called LPUs, or Language Processing Units," writes Moz Farooque, for TheStreet.

IBM recently announced the upcoming availability of the IBM Spyre Accelerator, an AI accelerator that enables low-latency inference. Spyre will be available on October 28 for IBM z17 and LinuxONE 5 systems, and in early December for Power11 servers.

Related: Analysts reset Broadcom stock forecast, revamp industry outlook