IBM stock jumps to 10-year high on accelerated AI growth

Key Points

• IBM stock is up 14.42% in the past month, gapping up 9.49% after better-than-expected fourth-quarter results.
• CEO Arvind Krishna attributes the success to the accelerating demand for AI.
• With a dividend yield of 3.53%, IBM has a 28-year track record of increasing shareholder payouts.

International Business Machines NYSE: IBM stock is trading at its best levels in nearly 10 years. 

Take a look at the IBM chart: The stock is up 14.42% in the past month and up 32.47% in the past three months. The stock broke out of a cup-with-handle base in November, clearing a buy point above $151.93. 

IBM stock gapped up 9.49% on January 25 after beating fourth-quarter views, as you can see using MarketBeat's IBM earnings data. The company topped analysts' forecasts on both the top and bottom lines.

What's behind the beats and the stock's move? As with any tech stock, you may first guess that AI is the reason, and that would be correct. 

AI business doubled

In the fourth quarter earnings report, IBM CEO Arvind Krishna said, "In the fourth quarter, we grew revenue in all of our segments, driven by continued adoption of our hybrid cloud and AI offerings. Client demand for AI is accelerating and our book of business for watsonx and generative AI roughly doubled from the third to the fourth quarter."

Krishna referred to IBM's watsonx AI platform, launched in 2023. The technology allows users to build and train AI models for a variety of business applications. 

IBM has been touting its AI business for the past several quarters, but this marked the largest single-day AI-driven price move since the launch of watsonx. 

Analysts expect IBM to earn $10.13 per share this year, a growth of 5% over 2023. Next year, that's seen rising by another 6% to $10.71 a share. 

IBM long ago reinvented itself as a tech consultant, rather than a hardware maker. 

Potential for AI being realized

Investors didn't consider IBM among the chief beneficiaries of AI in 2023, although the stock posted a one-year gain of 44.18% as shareholders understood the potential was there. 

That potential seems to have been realized, as earnings growth accelerated in the past three quarters, and revenue is growing again after being stagnant from late 2022 through mid-2023. 

IBM is making clear to investors that it's earned its place among the top artificial intelligence stocks. 

In the earnings report, IBM chief financial officer James Kavanaugh cited revenue growth, as well as profit margin expansion, increased productivity gains and strong cash generation as strengths in the quarter.

"Throughout 2023, those strengths enabled us to increase our investment in R&D and talent, and complete nine acquisitions to bolster our hybrid cloud and AI capabilities, all while continuing to return value to shareholders through our dividend," he said.

28 years of dividend increases

The IBM dividend yield is 3.53%; the company has a 28-year track record of increasing its shareholder payout. That lands IBM a spot on MarketBeat's list of dividend achievers.

Over the past decade, IBM has returned capital to shareholders through share buybacks. That reduces the number of shares outstanding, which increases earnings per share. That, in turn, has the effect of boosting investor confidence, often leading to a higher share price. 

IBM earnings have increased for the past three years. The company's three-year earnings growth rate is 16%. Its three-year revenue growth rate is 4%. 

In the earnings release, Krishna said 2023 revenue growth was in line with the company's expectations. 

Analysts boosting price targets

MarketBeat's IBM analyst forecasts show several price target boosts since the fourth-quarter report. The consensus price target is $171.92. That's an 8.49% downside. 

It's normal for analysts' targets to exceed the current price after a fast run-up. Analysts may adjust their targets gradually to reflect long-term growth expectations.

In a January 24 research note, Bank of America analysts boosted their price target to $200, giving the stock a rating of "buy." 

Despite the fast growth, Bank of America NYSE: BAC views IBM as a defensive investment "given its high exposure to recurring sales, cost-cutting levers, solid balance sheet, potential share gains, and relatively stable margins." 

Bank of America also said it expects the company to do further cost-cutting, as well as enhancing its service and software offerings through acquisitions. 

"Longer term, we expect IBM to take share in IT spending with its Cloud and AI initiatives," analysts wrote.