IBM jumped Thursday after the company reported a stronger-than-expected second quarter results, helped by demand for artificial intelligence tools. The Dow Jones tech giant also slightly upped its full-year guidance for free cash flow on the year.
IBM said it earned an adjusted $2.43 per share on sales of $15.77 billion for its June-ended quarter, in an earnings statement posted late Wednesday. Analysts polled by FactSet projected IBM would post adjusted earnings of $2.18 per share on sales of $15.62 billion.
Further, IBM said it expects to exceed its previous guidance for $12 billion in free cash flow for 2024. The firm reiterated its guidance for mid-single-digit revenue growth for the year.
On the stock market today, IBM stock gained 4% at close at 191.98.
IBM Q2 By The Numbers
IBM's earnings per share increased 11.5% for Q2 while sales increased 2% from a year earlier. Software sales increased 7%, making up for a 1% decrease in consulting revenue. At $6.7 billion for the quarter, software was IBM's largest division by sales. Consulting is second largest, with $5.2 billion in sales for the June quarter.
Meanwhile, IBM's leadership highlighted demand for its AI-related offerings.
"We had a strong second quarter, exceeding our expectations, driven by growth in both revenue and free cash flow," Chief Executive Arvind Krishna said in a news release. "We continue to see that clients turn to IBM for our technology and our expertise in enterprise AI, and our book of business for generative AI has grown to more than two billion dollars since the launch of Watsonx one year ago."
Krishna described the same metric as more than $1 billion in its first quarter report in April.
IBM's free cash flow for the June-ended quarter was $2.6 billion. The firm has generated $4.5 billion in free cash flow for the first six months of the year.
Analyst View On IBM Stock
Evercore ISI analyst Amit Daryanani reiterated a positive outperform rating for IBM stock, with a price target of 215.
"Overall performance is better than expected and free-cash-flow guide is notable," Daryanani wrote to clients late Wednesday. "Strength in software and infrastructure is partially offset by weakness on the consulting side but overall this is better than feared print vs. expectations."
Elsewhere, Jefferies analyst Brent Thill told clients he was "encouraged by the AI book of business doubling to $2 billion" but called the report mixed overall. While software revenue was better-than-expected overall, he noted that the company's closely-watched Data & AI and Red Hat software segments missed consensus estimates.
Red Hat is an open-source software firm IBM acquired for $34 billion in 2019.
Thill kept Jefferies' neutral hold rating on IBM stock, but upped his price target to 200, from 190.
"We believe shares could demand a higher premium to its consulting peers as the transition to a software company continues," Thill wrote to clients Thursday. "But concerns around the monetization of AI and the lack of a near-term catalyst keep us on the sidelines."
IBM Stock In Cup Base
In regular trading action Wednesday, IBM stock traded sideways in a downbeat day for the markets before closing at 184.27.
Coming into the report, IBM stock had gained 14.8% this year, slightly ahead of gains by the broader S&P 500. But the shares are off about 5% from a high near 199 that the stock reached in March.
Shares of the more-than-century-old tech giant rallied starting late last year. The company's growing backlog for AI-related work convinced investors that the technology could power new growth for the company.
While OpenAI's ChatGPT launched the generative AI hype, IBM brought attention to AI more than a decade ago with its "Jeopardy!"-winning Watson supercomputer. IBM is now offering broader enterprise AI services under the title WatsonX.
But a so-so first quarter earnings report in April and broader concerns about the market for IT spending set IBM back from spring highs. The stock had begun to recover in recent weeks, however, coming into the report.
IBD MarketSurge shows that IBM stock formed a cup base prior to its earnings statement, with a potential buy point of 199.18.
Meanwhile, IBM stock has an IBD Composite Rating of 79 out of a best-possible 99, according to IBD Stock Checkup. The score combines five separate proprietary ratings into one rating. The best growth stocks have a Composite Rating of 90 or better.
