International Business Machines (NYSE: IBM) stock surged 14% higher following its fourth-quarter and 2024 earnings report. Under CEO Arvind Krishna, the company has redefined itself as primarily a hybrid cloud and artificial intelligence (AI) company, and his leadership reversed what had been a long-term decline in the stock.
Consequently, the stock price has risen by around 35% over the last year. Now, investors must assess whether the stock remains a buy with a higher earnings multiple and lower dividend yield.
Krishna's turnaround at IBM began before he became CEO. As a division head, he spearheaded the purchase of Red Hat in 2019. This move made IBM a meaningful player in the hybrid cloud, and after taking the CEO job in April 2020, Krishna acquired more cloud companies.
Also, soon after GPT-4 changed the face of AI, IBM launched watsonx to support its work in next-generation foundation models. These developments led to the strong performance of its software segment, which grew its revenue by 8% during 2024.
Additionally, work in quantum computing has flourished under Krishna. While the technology has not yet gained widespread commercial interest, its ecosystem firmly positions IBM to prosper in this industry as more applications appear.
Furthermore, IBM's dividend has risen for 29 straight years. At $6.68 per share annually, its dividend yield is 2.5%, even after the stock price increases. This is more than double the S&P 500 average of 1.2%, presumably making IBM stock an excellent choice for dividend investors.
However, other parts of the company resemble the stagnant IBM of the past. The consulting and infrastructure businesses still generate more combined revenue than the software segment. Unfortunately, consulting revenue grew by only 1%, while infrastructure revenue dropped 4% yearly in 2024.
Unsurprisingly, the differing results of IBM's segments affected its financial performance. In 2024, revenue of $63 billion grew by 1% yearly.
Moreover, its 2024 net income actually fell to $6.0 billion versus $7.5 billion in 2023. A $2.8 billion decrease in income from foreign currency and other investments caused the drop, which indicates the lower earnings are not as concerning as they might appear.
Additionally, IBM's management offered a rosier outlook for the immediate future, revealing that the company expects revenue growth to rise to 5% in 2025. By the same token, it predicts free cash flow will rise to $13.5 billion in 2025, up from the $12.7 billion generated in 2024. This bodes well for continued increases in the dividend, which should reassure the stock's shareholders.
Story Continues
Unfortunately, investors will have to pay for this increased prosperity. Thanks to the rising stock price, its price-to-earnings (P/E) ratio is now 39, well above the S&P 500 average of 30.
Admittedly, the forward P/E ratio is a more modest 23, which may have helped fuel the rising stock price. Still, the stock has undoubtedly become more expensive, and investors will have to decide whether it still offers value.
At current levels, IBM is more likely a hold.
Given the record-high stock price and its rising prominence as a cloud and AI stock, one has to assume IBM has orchestrated a comeback under Krishna. Consequently, the success has led to significant gains for its shareholders.
Indeed, the successes would likely improve if IBM could either revive or sell its stagnant consulting and infrastructure businesses. Nonetheless, the revenue forecast strongly indicates that the cloud and AI segments have revived IBM as a force in the tech industry, meaning investors should probably consider the stock if the valuation falls below the S&P 500 average.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends International Business Machines. The Motley Fool has a disclosure policy.
Has IBM Stock Become a Buy? was originally published by The Motley Fool
