IBM shows promise in AI sector despite recent challenges

International Business Machines (NYSE: IBM) is experiencing renewed interest in the artificial intelligence (AI) sector, reflected in a substantial stock market performance that has seen shares increase by 37% in 2024, or 44% when considering total returns including reinvested dividends. Despite this upward trend, questions linger about the sustainability of IBM’s growth trajectory as the year draws to a close and 2025 approaches.

A recent report from Yahoo Finance highlights that while IBM’s third-quarter results may initially appear modest—with a mere 2% increase in sales year over year attributed solely to foreign exchange effects—further analysis reveals a more nuanced picture. Even though bottom-line earnings per share (EPS) rose by 5%, driven partly by a lower tax rate, the company’s performance has not sparked excitement amongst investors. The report indicates a notable downturn in IBM’s infrastructure segment, which experienced a 7% dip in revenue, largely due to a 19% decline in the cyclical IBM Z mainframe business.

This decline in mainframe sales is expected to be temporary, especially with an upcoming refresh of the IBM Z systems slated for 2025, incorporating more AI capabilities driven by IBM’s proprietary AI chips. This product cycle is anticipated to reinvigorate this segment, although the impacts may not be immediately felt.

Conversely, IBM’s software and services sectors are thriving. Automation revenues surged by 13%, while the Red Hat hybrid cloud business posted a 14% increase. Additionally, AI revenues grew by 5%, reflecting a broader landscape where AI’s contribution to sales has yet to reach its full potential, despite the pressing demand for advanced technology solutions.

IBM’s business model, which is founded on establishing long-term subscription and technical support contracts rather than quick sales, explains the measured pace of revenue growth. Prospective clients typically engage in extensive evaluations, including multiple rounds of technical testing and approval processes before committing financially. This deliberate approach can stretch the time frame from contract initiation to revenue realisation, particularly for complex implementations like generative AI systems.

In the spring of 2023, IBM launched its generative AI platform, watsonx. A year later, watsonx has secured over $2 billion in multi-year contracts, with $1 billion added just a quarter later—a 50% increase indicating a significant uptick in demand. As IBM transitions these contracts into actual sales over time, the potential for future growth in its AI segment appears promising, aligning with its strategic focus on nurturing long-term client relationships.

In summary, while IBM’s immediate financial metrics may not exhibit soaring growth, the structural foundation it is building in the AI sector, coupled with upcoming product releases, suggests that the organisation remains a pivotal player in the evolving landscape of business automation and artificial intelligence. Investors and market observers will continue to monitor IBM’s performance as it navigates the complexities of driving growth in a competitive marketplace while aiming for sustainability in its innovative endeavours.

Source: Noah Wire Services