Magnificent 7 Earnings Week: This AI Stock Outperformed Them All

This week was known as Magnificent Seven week, part one, as four of the largest companies in the world posted quarterly earnings.

But neither Tesla (NASDAQ:), Microsoft (NASDAQ:), Meta Platforms (NASDAQ:), nor Apple (NASDAQ:) made much of an impact this week, one way or the other. However, there was one AI stock and technology pioneer that did — IBM (NYSE:), a company that was once the largest in the world.

IBM, also known as Big Blue, was the second-best performing stock on the S&P 500 this week, rising 13.5%. Big Blue was fueled by its solid fourth quarter results and robust outlook.

IBM stock is up about 16% year-to-date and around 36% over the past 12 months, trading at $255 per share.

Transforming through AI

IBM revenue and earnings estimates, propelled by its software business and its AI capabilities. The firm generated $17.6 billion in revenue in the quarter, which was up just 1% year over year. That was ahead of estimates of $17.4 billion.

Net income fell 11% in the quarter to $2.9% billion, or $3.11 per share. On an adjusted basis, net income was up 3% to $3.7 billion, or $3.92 per share, which exceeded consensus estimates of $3.75 per share.

GAAP earnings were reduced due, in part, to a one-time, non-cash pension settlement charges in the third quarter of $2.7 billion, or $2.0 billion net of tax, in the U.S. and $400 million in the fourth quarter outside the U.S.

Revenue gains got a boost from its software segment, which posted a 10% increase to $7.9 billion. The software business is IBM’s largest, and it includes cloud services as well as its AI platform, which helps customers train their generative AI models through watsonX. Cloud services via its Red Hat business saw revenue rise 16%, while the data and AI segment generated a 4% revenue spike in the quarter.

The strength of its software business overcame a 2% decline in its consulting business to $5.2 billion, and an 8% drop in its infrastructure business to $4.3 billion. The infrastructure segment was once the cash cow of the business, as IBM was the leading manufacturer of computers and other business machines. But the company has been able to change with the times.

“We closed the year with double-digit revenue growth in Software for the quarter, led by further acceleration in Red Hat,” Arvind Krishna, IBM chairman, president and CEO, said. “Clients globally continue to turn to IBM to transform with AI.”

Well positioned for 2025

IBM stock shot higher mainly because of its AI-fueled growth. Krishna said the firm’s generative AI book of business is over $5 billion, up nearly $2 billion quarter over quarter.

“With our focused strategy, enhanced portfolio, and culture of innovation, we’re well-positioned for 2025 and beyond and expect revenue growth of at least five percent and free cash flow of about $13.5 billion this year,” he said.

For the full year 2025, IBM anticipates 5% revenue growth and $13.5 billion in free cash flow.

In 2024, IBM had free cash flow of $12.7 billion which was $1.5 billion more than the previous year. The abundance of cash was fueled by IBM’s high profit margin of 59.5% in Q4 and 56.7% for the full year.

“Continued strength in operating profitability and free cash flow fuels our ability to invest for the future while returning value to shareholders through dividends,” James Kavanaugh, IBM senior vice president and chief financial officer, said.

A Dividend Aristocrat

IBM has one of the best dividends on the market. The $1.67 per share quarterly dividend has a 2.59% yield. IBM has raised its dividend annually for 25 straight years, making it a Dividend Aristocrat.

IBM got a bunch of price target upgrades post earnings, including a $20 bump from BMO to $280, a $26 increase from RBC to $276 per share, and a $25 increase from Jefferies to $270 per share. They would represent increases of 6% to 10% over the current share price.

While IBM’s P/E ratio is high at 40, its forward P/E is reasonable at 24. IBM may not be as magnificent as it once was, but its performance this week was stellar. And based on its balance sheet, growth in AI, and decent forward P/E, it should have more good days ahead.

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