Top News

Earnings Outlook: IBM has been talking up AI, but here’s what investors should really focus on in earnings

International Business Machines Corp. may be hitching to the artificial-intelligence bandwagon with its new WatsonX initiative, but analysts are more interested in areas of Big Blue’s business that are translating into serious revenue in the here and now.

When IBM

reports second-quarter earnings after Wednesday’s market close, analysts will be keenly watching for commentary on the company’s open-source software platform Red Hat, with UBS analyst David Vogt pessimistic about the potential for upside there in the second half of the year.

“By segment, Red Hat growth in the second quarter remains an important metric to monitor as management expects Red Hat to contribute ‘about half of the expected 5 points of software growth’ in 2023,” wrote Vogt, who has a sell rating and a $110 price target on IBM’s stock.

Vogt forecast Red Hat growth of 11% for the second quarter, which would require “a sharp acceleration” in the second half of the year to hit the midpoint of the company’s 11% to 13% guidance. Given cautious commentary from other Linux companies, Vogt sees reports of “push outs and [a] reduction in contract lengths” as potentially risky signals heading into the second half of the year.

Meanwhile, Red Hat is facing backlash over its new source-code policies that are reportedly making it difficult to create operating systems compatible with Red Hat Enterprise Linux, according to ZDNet.

As companies rush to convince investors of their involvement with AI, IBM has played up its WatsonX enterprise-AI offering, but while JPMorgan analyst Brian Essex was “encouraged” by the product, he’s not expecting a sizable financial role for it in the near term.

Essex wrote that he does “not expect meaningful revenue contribution until next year at the earliest and think[s] investors will need to see evidence of traction before underwriting an AI contribution due to mixed results IBM has had in the past with traditional AI efforts.”

He rates IBM shares at neutral with a $145 target price.

Also read: Amazon, Microsoft and Google cloud services bet heavily on AI, but do their customers even want it?

Stifel analyst David Grossman said that while it’s too early for WatsonX to contribute to material growth, the product “appears to be a solid open-AI platform integrating IBM’s core technologies.”

“IBM will have a seat at the enterprise AI table given its legacy Watson initiative, increasing security concerns and enterprise positioning,” Grossman said, recommending the stock as a “defensive market hedge” for “dividend-sensitive” investors. He has a buy rating and a $140 price target on the shares.

Last earnings report: IBM boasts how AI can improve productivity, pays up to $260 million in ‘stranded costs’ after laying off thousands

“While IBM continues to trade below primary peers in core markets and the company has seen meaningful margin expansion over the past few years, we think greater consistency and more favorable macro conditions are needed for fundamental upside and multiple expansion,” Grossman said.

IBM confirmed in late June an $4.6 billion all-cash deal for cloud-based business software company Apptio. Grossman estimates that Apptio could come to add up to 40 basis points to software growth and less than 20 basis points to IBM’s overall growth rate.

IBM is forecast to report second-quarter earnings of $2.02 a share on revenue of $15.57 billion, compared with $2.31 a share on revenue of $15.54 billion in the year-ago period, according to FactSet data.

You may also like

Leave a reply

Your email address will not be published. Required fields are marked *

More in Top News