Opinions
Jim Cramer - Mad Money
IBM Common Stock
IBM-N
BUY
Jan 31, 2025
Stock price when the opinion was issued
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Has owned it in the past. When he held this at $180, the market was ignoring IBM's AI business and saw low growth. So, he bought it. IBM teamed up with Meta to enhance their Watson franchise. He made good money. Then, he started to see the PE rising into the 20s, and Accenture and other peers reported weak results. So, he exited and wouldn't re-enter.
Starting to get back into the really exciting parts of technology somewhat. Doesn't have the growth he's looking for, only 6-7% growth and paying 21x PE. In the tech space, you really want to see 10-20% earnings growth. Trendlines have been decent, but now down to 200-day MA (could be a buying opportunity, but not for him).
It has transformed into a hybrid cloud and AI company. Software does remain the engine. Has $7.5 billion in AI related business. Margins are quietly improving with strong cash flow. Yield is 2.7%. It is a real contender in the quantum race. She sees 18% upside potential and in the longer run of 12 months 27%. Buy 8 Hold 10 Sell 2
(Analysts’ price target is $283.05)Purchase of Red Hat really put them in the cloud and data centre business, saved them. Over last couple of years, execution of business plan was perfect. But more recently, especially in Q2 earnings, execution faltered. He's been adding in the $240 area. 12-month price target of $314.
It just reported great numbers and shares jumped 13%. Redhat has made this an AI winner. It rallied 34% last year. They've had 6 straight quarters of positive sales growth, leading to an earnings beat and excellent free cash flow. Their full year forecast includes accelerating revenue growth and free cash flow. YOY growth: infrastructure -8%, consulting -2%, software 10% which is the largest segment, amounting to 43% of 2024 revenues. Software got stronger as 2024 wore on, and this segment could make up 50% of IBM's business. Specifically, Red Hat grew 16% YOY in Q4 and automation 15%. Watson X and Red Hat are key growers, enjoying the AI tailwind. Their GenAI business generates over $5 billion of business, growing by $2 billion, quarter-over-quarter. That said, shares went sideways last October given a miss in their consulting business, but the CEO feels AI will return this segment to growth in 2026. Tailwinds: a good backlog, record signing in Q4, and business in GenAI all support accelerating growth in low-single digits. Caveat: their PE is 24x PE and 22x in 2026, instead of around 10x, but their return to steady growth justifies the PE and software will generate more recurring revenue. An indirect AI play that won't be hurt by DeepSeek.