IBM’s stock saw a significant uptick on Monday, driven by a bullish recommendation from Goldman Sachs analyst James Schneider. Schneider initiated coverage of IBM with a Buy rating and set an ambitious price target of $200, which represents approximately a 16% increase from the stock’s closing price on the previous Friday. This optimistic forecast contributed to a 3.3% rise in IBM’s stock by midmorning, pushing the price to $178.18. So far this year, IBM’s stock has risen by 8% and has surged by 36% over the past 12 months.
Broader IT Services Sector Coverage
This recommendation on IBM is part of Schneider’s comprehensive coverage launch of eight companies in the information technology services sector. Among these, Schneider also issued a Buy rating and a $200 price target for Globant. On the flip side, he assigned Sell ratings to Thoughtworks and TaskUS, and Neutral ratings to Accenture, Cognizant, EPAM Systems, and Softchoice.
Schneider highlighted that the stocks of these companies have collectively declined by an average of 16% this year. This downturn is attributed to constrained IT spending due to macroeconomic pressures affecting multiple industries and a shift in corporate spending priorities towards AI-focused investments at the expense of traditional software and services.
Impact of Generative AI and Sector Risks
Schneider is bullish on the long-term potential of generative AI, predicting that it will be a net positive for the IT services sector over time. However, he also pointed out some inherent risks, particularly in the business process services segment, which might face challenges as AI technology evolves and reshapes industry dynamics.
IBM’s Strategic Shift and Growth Prospects
Focusing on IBM, Schneider expressed confidence in the company’s strategic direction. He believes IBM is successfully transitioning towards sustained long-term growth. This optimism is based on IBM’s evolving product mix, which increasingly includes infrastructure software with a focus on open-source and AI technologies. Additionally, Schneider highlighted IBM’s consulting business, which he describes as “uniquely complementary” and sees as gaining market share decisively.
Schneider wrote, “We think the stock can continue to rerate higher as the software business mix improves, and the company continues to demonstrate consistent financial performance.” He anticipates IBM sustaining a long-term revenue growth rate of 5% to 7%, with free cash flow growth of around 10%. This growth is expected to be driven by advancements in AI products and services, market share gains in consulting, and the expansion of IBM’s core software portfolio.
Valuation and Future Expectations
Schneider also predicted that IBM’s forward price-to-earnings ratio could climb to 18 times or higher, up from the 9 to 13 range seen prior to 2020 and the recent figure of approximately 16.6 times. This potential increase in valuation underscores confidence in IBM’s ability to deliver sustained growth and maintain robust financial performance.
Conclusion
James Schneider’s positive outlook on IBM has been well-received by the market, as evidenced by the significant rise in the stock’s price. His broader analysis of the IT services sector indicates a shift in investor sentiment, with a notable focus on the long-term benefits of generative AI. Despite some secular risks, particularly in business process services, the overall expectation is for continued growth and improved financial performance across the sector, with IBM positioned to be a key beneficiary of these trends. This comprehensive approach suggests a cautious but optimistic view of the future, balancing near-term challenges with long-term growth opportunities.