Investing.com - Jefferies released a research note on Tuesday, highlighting the need for tech giant International Business Machines (NYSE:IBM) to accelerate its software momentum.
Despite IBM 's outperformance of the IGV (iShares Expanded Tech-Software Sector ETF) by 7% YTD, Jefferies believes that the company's stock is likely to remain range-bound, with modest growth in the 3-4% range.
The three key areas analysts are monitoring include software growth, consulting, and AI contribution. The firm anticipates challenges in software growth due to tougher comparisons, and in consulting, which missed revenue expectations and saw a lowered guidance in the first quarter.
Furthermore, Jefferies does not expect AI to make a significant contribution to the software sector this year.
IBM, often referred to as 'Big Blue', is seen as a slow-moving entity, with Wall Street predicting just 1% total revenue growth in 2Q and a 15% free cash flow (FCF) margin. The sluggish growth expectations are largely due to the consulting segment, where other industry players such as Accenture plc (NYSE:ACN), Cognizant Technology Solutions Corp (NASDAQ:CTSH), and Infosys (NYSE:INFY) have reported ongoing uncertainty over discretionary spending projects.
Software growth is projected to be 2.5% year-on-year, almost three times the overall revenue growth in 2Q. As IBM transitions towards a software-led model, the company's software performance is considered crucial for driving more substantial bottom-line growth. Software accounted for 40% of total revenue but approximately two-thirds of pre-tax income in CY23.
In 2Q, the software business is expected to contribute the majority of overall growth, as well as in FY24. The consensus estimate for software revenue in 2Q is $6.5 billion, representing a 2.5% year-on-year growth.
Jefferies emphasized the importance of strong execution in the Red Hat business and the successful integration of HCP for achieving sustainable software growth.
The consulting business growth expectations are relatively muted due to weaker near-term demand. However, Jefferies believes that AI will significantly benefit the consulting sector in the short term, with IBM recording over $1 billion of AI bookings over the last three quarters, primarily weighted towards consulting.
Analysts deemed the risk/reward as balanced, with IBM shares trading at 20 times CY25E EPS, compared to Microsoft (NASDAQ:MSFT) at 32 times and Oracle (NYSE:ORCL) at 28 times.
Analysts at Jefferies maintained their 'Hold' rating for IBM with a price target of $190.