International Business Machines (IBM 0.68%) is set to report its fourth-quarter results after the market closes on Wednesday, Jan. 29. IBM stock has surged 65% over the past three years as the company spun off a big low-growth business and settled into a strategy focused on hybrid-cloud and AI platforms.
With IBM trading near its all-time high, is it smart to buy the stock now or wait until the earnings dust has settled?
For long-term investors, timing doesn’t really matter
Shares of IBM could do just about anything in response to Wednesday’s report. If the company comes up short of expectations, provides lackluster guidance, or discloses a slowdown in AI-related bookings, the stock could drop. If instead the tone is more optimistic, the stock could rally.
If you’re a long-term investor, trying to time the market is mostly a waste of time. If you buy and hold IBM stock for years, short-term fluctuations driven by quarterly earnings just aren’t going to matter.
There are plenty of reasons to buy IBM stock, either now or after the Q4 report. The company has finally found its groove after a decade-long transformation effort, and the next ten years look a lot more promising than the last ten years. IBM’s unique combination of software platforms and consulting services has set it up for steady growth in the years ahead.
IBM’s Q3 results were mixed relative to expectations, but the numbers largely looked good. Software revenue soared 10% year over year, with a solid 9% transaction processing growth coupled with 14% growth in the Red Hat portfolio. The consulting segment was flat, although challenges weren’t a surprise. There’s plenty of demand for digital transformation projects, but in other areas, clients have been stingier with their spending.
The consulting business is a critical component of IBM’s growth strategy, and that’s nowhere more apparent than in AI. As of the end of Q3, IBM has booked more than $3 billion worth of generative AI-related business. The company’s watsonx.ai platform is the centerpiece of the company’s generative AI efforts, but roughly 80% of those bookings were consulting signings. With its consulting arm, IBM can tap into demand for AI implementation and other related services while also pitching its own AI software products.
A reasonably priced stock
IBM expects to generate more than $12 billion in free cash flow for 2024, and investors will know on Wednesday whether the company hit that target. Based on the current market capitalization, IBM stock trades for 17 times that free-cash-flow outlook.
That’s not an unreasonable price to pay. IBM isn’t the fastest growing company, but it does have a vast enterprise customer base with relationships that sometimes go back decades. As those clients look to modernize applications and deploy generative AI, IBM is positioning itself as the obvious choice for a partner.
IBM’s free-cash-flow guidance for 2025 will likely play a big role in how the stock behaves following the Q4 report. IBM should be able to grow its free cash flow this year, although there are a lot of moving parts that could impact the company’s results. Regardless of how IBM’s results and guidance are perceived by the market, the stock is a buy for long-term investors.
Timothy Green has positions in International Business Machines. The Motley Fool has positions in and recommends International Business Machines. The Motley Fool has a disclosure policy.
