How Will IBM Stock Trend Post Q2 Earnings?

Computing behemoth IBM
IBM
is slated to report its Q2 2023 results on July 19th. We estimate that IBM’s revenue will come in at about $15.57 billion for the quarter, marginally ahead of the consensus estimate of about $15.56 billion and roughly flat versus last year. We estimate that earnings will stand at close to $2.05 per share, compared to a consensus of $2.00 per share. So, what are some of the trends that are likely to drive IBM’s earnings?

We expect IBM’s core software operations to be one of the key drivers of growth for the second quarter. While software-related sales rose just about 3% in Q1, partly due to currency-related headwinds and a slower uptake for automation, security, and AI-related tools, the company benefited from higher sales of Red Hat
RHT
products. Red Hat, which was acquired in 2019 has been a key growth driver for IBM, given its large portfolio of open-source technology, its hybrid cloud platform, and its large developer community. IBM has guided for mid-single-digit growth for the software business this year and we could see growth pick up a bit over Q2. IBM’s consulting business could benefit from higher demand for application-related consulting. It’s possible that the AI side of the consulting business could also begin to see a bump as companies look to increasingly deploy generative AI tools.

We think IBM stock is likely to see some modest gains following its Q2 results. At the current market price of about $134 per share, IBM stock trades at roughly 14x consensus 2023 earnings. We believe that this is a reasonable valuation, given that IBM is focusing on core areas such as cloud computing, AI, and automation after divesting its legacy business. IBM is also making mid-size acquisitions to bolster its portfolio of higher-margin software products. The company recently acquired Apptio, a cloud software company that helps businesses to manage and optimize their IT spending. We value IBM stock at $142 per share, roughly 6% ahead of the current market price. See our analysis IBM Valuation: Expensive or Cheap for more details on what’s driving our price estimate for IBM. Also, check out the analysis of IBM Revenue for more details on how IBM revenues are trending.

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