IBM (NYSE: IBM) stock surged nearly 13% on January 30, marking its best single-day gain in over a decade.
The rally followed a strong fourth-quarter earnings report, which highlighted robust revenue growth and a significant increase in AI-related bookings.
The stock closed at an all-time high of $258.27 on January 30, extending its year-to-date gains to 17%, outperforming the S&P 500’s 3% rise over the same period.
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Strong Q4 results beat expectations
IBM’s Q4 earnings surpassed Wall Street estimates, reporting adjusted earnings per share (EPS) of $3.92. Total revenue for the quarter reached $17.6 billion, marking a 1% increase year-over-year (YoY).
A key driver behind IBM’s performance was its software segment, which saw 10% YoY growth. This growth was fueled by increased enterprise demand for AI-driven solutions, led by further acceleration in Red Hat, which saw 16% growth.
“We closed the year with double-digit revenue growth in Software for the quarter, led by further acceleration in Red Hat. Our generative AI book of business now stands at more than $5 billion inception-to-date, up nearly $2 billion quarter over quarter,” said Arvind Krishna, IBM chairman and Chief Executive Officer.
IBM’s generative AI book of business has surpassed $5 billion inception to date, increasing by $2 billion from the previous quarter. The segment is dominated by consulting, which accounts for about 80% of the total, while software makes up the remaining 20%.
AI momentum and open-source strategy differentiate IBM
IBM’s AI expansion has been a key focus, particularly as the company differentiates itself from competitors by offering open-source AI models. The company made its ‘Granite’ family of AI models open-source in May.
IBM sees DeepSeek as a validation of its long-held stance that smaller AI models with more efficient training times are critical for enterprise adoption of large language models (LLMs).
The company said it has been pursuing this approach for over a year, achieving up to a 30-fold reduction in inference costs by optimizing model efficiency.
“We have been down that journey ourselves for more than a year. We see as much as 30 times reduction in inference costs using these approaches”- Arvind Krishna
IBM’s open-source push aligns with growing global interest in AI accessibility, though its impact on market share against proprietary AI models remains to be seen.
Challenges in consulting and infrastructure segments
Despite AI and software successes, IBM’s consulting unit struggled, with revenue dropping 2% to $5.18 billion, marking its fourth consecutive quarterly decline.
Consulting remains IBM’s largest AI revenue driver, but the segment’s slower revenue realization has yet to reflect the broader AI demand surge. The infrastructure and finance segments also faced headwinds, with revenue declining 7.6% and 2.5%, respectively.
2025 outlook and analyst reactions
For the fiscal year 2025, Big Blue has set ambitious growth targets, projecting at least 5% revenue expansion and $13.5 billion in free cash flow, surpassing Wall Street’s $12.9 billion estimate.
Analysts responded positively to the company’s AI-driven momentum, with RBC Capital analyst Matthew Swanson raising the price target to $276 from $250, maintaining an ‘Outperform’ rating.
Swanson highlighted IBM’s strong Q4 performance, particularly in free cash flow, GenAI bookings, and Red Hat growth, all of which exceeded expectations and built momentum heading into 2025.
Morgan Stanley analyst Erik Woodring also raised IBM’s price target to $228 from $217, keeping an ‘Equal Weight’ rating, after the company outperformed Q4 free cash flow targets for the second consecutive year.
However, not all analysts were entirely bullish. J.P. Morgan analyst Brian Essex maintained a ‘Hold’ rating, acknowledging double-digit growth in IBM’s Software segment, particularly from Red Hat and Transaction Processing, which now account for a larger share of total revenue.
Conversely, Essex noted that much of the positive outlook is already priced into the stock, and IBM’s consulting growth remains weak despite strong deal signings.
IBM is set to hold an investor day next week, where it is expected to provide further details on its AI strategy and financial targets.
Featured image via Shutterstock
