Why IBM Stock Was Up 14% Today

Source The Motley Fool

International Business Machines (NYSE: IBM) stock soared 13.6% through 11:10 a.m. Thursday morning after the tech giant beat on both sales and earnings last night.

Analysts had forecast IBM would earn $3.78 per share, adjusted for one-time items, on $17.54 billion in sales for its fiscal fourth quarter of 2024. Instead, IBM reported a $3.92 per share adjusted profit. Its sales were $17.56 billion.

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Fourth-quarter earnings

Not all of IBM's news was great. Sales for the quarter grew a bare 1%, and sales for the full fiscal year were up only 1.5%. Earnings for the quarter, while better than expected, still declined 13% year over year, as calculated according to generally accepted accounting principles (GAAP), to just $3.09 per share. GAAP earnings for the year suffered worse, down 21% to $6.43 per share.

Nevertheless, IBM considers the quarter a success. CEO Arvind Krishna talked about double-digit revenue growth in software and highlighted the fact that "our generative AI book of business now stands at more than $5 billion inception-to-date, up nearly $2 billion quarter over quarter."

You read that right. Despite all the worries about DeepSeek this week, IBM still wants investors to think of it as an artificial intelligence stock.

Is IBM stock a buy?

But perhaps that's not a bad thing? After all, IBM says it generated $12.7 billion in positive free cash flow in 2024 -- twice its reported $6 billion in GAAP net income. And profit margins are ticking up as well. In the fourth quarter, the company grew its operating profit margin 50 basis points (by non-GAAP measurements), and non-GAAP margins were up 130 basis points for the full year.

And turning to guidance, management says it's expecting to grow revenue at least 5% this year, and to grow free cash flow modestly, to $13.5 billion -- on a $239.5 billion market capitalization that values IBM at about 17.7 times this coming year's free cash flow.

That's cheaper than a lot of other tech stocks these days. I just don't think it's cheap enough, if IBM is growing sales by only 5%.

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Rich Smith 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.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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