IBM Continues to Plug Along, but Its Quantum Computing Bet Could Be the Real Catalyst

While it seems like most tech companies are staking their fortunes on artificial intelligence (AI), International Business Machines (NYSE: IBM) is betting big that quantum computing could be the technology that changes its trajectory. It is the mega-cap tech company most tied to this nascent technology, and if it can crack the quantum code and become a leader in the space, its stock could have a lot of upside from here.

In the meantime, IBM's core business continues to plug along. Let's dig into the company's Q3 results and prospects to see if now is the time to buy the quantum computing stock.

Betting big on quantum computing

On its Q3 earnings conference call, IBM CEO Arvind Krishna said, "Quantum remains a strategic area of differentiation for IBM and a significant long-term opportunity."

Not surprisingly, the company is making significant investments to advance the technology. IBM uses traditional superconducting qubits, which haven't proven to be as accurate as the trapped-ion technique used by rivals IonQ and Quantinuum. However, the technology is much faster, with its Nighthawk r2 processor exceeding 100,000 circuits per second, whereas trapped-ion quantum computers operate at microsecond gate speeds.

However, IBM has projected that it will develop a fault-tolerant quantum computer by 2029. If it reaches this goal, it will be largely due to its quantum low-density parity check (qLDPC) codes. These error-correcting codes require specific software and hardware implementation and allow a quantum chip to pack in significantly more logical qubits while using far fewer physical qubits. The company has also developed a chip called Loon that can provide the long-range connectivity needed for these codes that conventional superconducting chips can't support.

IBM said advancement to Stage C of DARPA's Quantum Benchmarking Initiative (QBI), meanwhile, helps validate its current quantum strategy. It has also signed 16 quantum computing enterprise agreements so far this year, demonstrating its early commercial momentum, and is building a huge manufacturing facility in Poughkeepsie, New York.

Turning to IBM's results, they remain stable. For Q3, its revenue rose 5% year over year to $17.1 billion, which was ahead of the $16.82 billion consensus, as compiled by LSEG.

Consulting revenue was flat on the quarter at $7.8 billion, while infrastructure revenue rose 4% to $3.7 billion. Its z17 mainframe business remained a weak spot, down 20%. Software revenue, meanwhile, climbed 8%. Within software, Red Hat was once again a bright spot, with revenue jumping 11%, while data surged 19% and transaction processing climbed 9%. Adjusted earnings per share (EPS) climbed by 11% to $2.95. That was well ahead of the $2.86 analysts had expected.

Looking ahead, IBM continues to look for 4% to 5% revenue growth for the year. It also said it was comfortable with the current analyst revenue for full-year software revenue of around $32 billion, with Red Hat expected to see another quarter of double-digit growth in Q4.

Image source: The Motley Fool.

Betting on quantum computing

With IBM shares trading at a forward price-to-earnings (P/E) ratio of 19 based on analysts' 2027 earnings estimates, it's pretty safe to say that investors are assigning some value to its quantum computing ambitions. That's a market multiple for a stock with solid, but moderate growth.

Overall, the company saw a nice rebound in performance from Q2, when it saw big declines in its hardware business and declining revenue in its transaction processing business within its software segment. However, the only reason to really own the stock, in my view, is for the company's quantum computing business. It has super-fast technology, and if its error-correction technique proves effective in creating a fault-tolerant quantum computer, IBM's fortunes will be changed, and the stock will have a lot of upside from here.

As such, I view IBM as a good stock to include as part of a broader basket of quantum computing stocks.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends International Business Machines and IonQ. The Motley Fool has a disclosure policy.