After rising 30% in the past 12 months, will IBM's stock price rise even further after the company reports second-quarter earnings, fueled by the power of AI and Red Hat?

Computing giant IBM is set to release its second-quarter 2024 results in mid-July, reporting that the company's revenues will likely decline this quarter due to a cooling in IT spending. It expects revenues to be about $14.6 billion, down 6.6% compared to last year, which is slightly above the consensus estimate. It expects earnings to be $2.06 per share, slightly above the consensus estimate and about 5% lower than last year. So what are some of the trends that could boost IBM's revenues?

We expect IBM's core software business to remain a key driver of the company's performance. Software revenues rose 5.5% to $5.9 billion in the first quarter, driven by Red Hat, which has a large portfolio of open source technologies and hybrid cloud platform solutions and a large developer community. We expect this trend to continue in the second quarter. Separately, IBM is looking to capitalize on the growing demand for artificial intelligence. While big tech companies like Google and Microsoft are focusing on more general-purpose large-scale models for the public, IBM is looking to help enterprise clients with AI models customized for their business. IBM's Watsonx platform allows companies to train, tune, validate and deploy AI models customized for business applications while taking legal and regulatory concerns into account. A few months ago, IBM indicated that it has booked more than $1 billion in generative AI business since inception and that it is making significant profits on the consulting side by guiding clients on implementing AI-related software. IBM's infrastructure business could have a more mixed quarter. The company is seeing growing demand for IBM Z mainframes and distributed infrastructure, but is also facing headwinds in its infrastructure support business.

The growing interest in generative AI has led to a massive 40% increase in IBM shares, from $125 in early January 2021 to $175 today. Meanwhile, the S&P 500 has risen by about 45% over the past three years. In contrast, Arista Networks, which has also benefited from generative AI, has seen its shares soar by more than 300% over the same period. Arista is a market leader in high-speed networks for hyperscalers and large enterprises, which are key stakeholders in the generative AI trend. Arista is part of the 30-stock Trefis High Quality Portfolio, Outperforming the S&P 500 every year During the same period. why is that? As a group, the stocks in the HQ Portfolio offered higher returns with lower risk compared to the benchmark index, and there was less rollercoaster volatility as evidenced by the HQ Portfolio's performance metrics: So, can Intel stock perform better going forward?

With a current market price of around $176 per share, IBM stock trades at nearly 19 times the consensus estimated earnings for 2024. While IBM's growth rates are lackluster, we believe this is a reasonable valuation given that IBM is focusing on core areas where it sees growth, such as cloud computing, AI, and automation, after divesting its legacy businesses. IBM is also making mid-tier acquisitions to bolster its portfolio of high-margin software products. We value IBM stock at $180 per share, which is slightly above the current market price. See our analysis. IBM evaluation: Expensive or cheap? For more information on what factors are driving IBM's price forecast, please see here. IBM Revenue For more information on IBM's revenue trends, click here.

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