IBM’s (IBM) software and AI businesses appear to be flourishing, while it could potentially generate a great deal of revenue from militaries in the longer term. Another favorable attribute of Big Blue is the fairly rapid growth of its profit and profit margins.
On the negative side of the ledger are the company’s fairly slow revenue growth, the hit that it is likely to take from DOGE, and the unimpressive expansion of its large consulting business.
Still, in light of the company’s huge potential, its high profits, its elevated dividend, and its reasonable valuation, long-term, conservative investors should consider purchasing the shares.
Impressive AI and Software Businesses
IBM’s first-quarter results, reported on April 25, show that its software and AI businesses are performing quite well. During the quarter, its generative AI backlog jumped by more than $1 billion to over $6 billion,.
” In software, the ability to deploy our AI assistants and agents as well as AI middleware in a hybrid environment, leveraging multi model capabilities is resonating with clients.,” CEO Arvind Krishna explained.
Focusing on providing affordable, security-oriented AI, the tech giant is using its existing relationships with many businesses to market its AI solutions to them, Steven Dickens, the CEO of HyperFRAME Research told the Schwab Network on April 23.
In light of most companies’ high interest in both their bottom lines and IT security, along with their affinity for doing business with firms that they already know and trust, IBM’s approach should continue to be highly successful going forward.
Driven by the strong performance of IBM’s Red Hat unit, the company’s software revenue climbed by an impressive 9% in Q1 versus the same period a year earlier.
Red Hat, whose open-source software facilitates the use of AI products in conjunction with multiple types of cloud environments, generated year-over-year bookings growth of nearly 20% and YOY revenue growth of 13%. Red Hat’s virtualization and automation offerings are also generating “great demand,” Krishna said.
Also importantly, software, which tends to carry high profit margins, is continuously becoming a larger part of the company’s overall revenue.
Illustrating this point, in 2020, software accounted for slightly over 20% of the firm’s overall sales, while that proportion jumped to over 40% in 2024.
Great Potential in the Military Sector and Strong Profitability
Last December, IBM announced that Lockheed Martin (LMT) had decided to extensively utilize IBM’s large language models (LLMs). Specifically, LMT is using the LLMs in conjunction with its AI Factory tools. These systems ” are accessed by more than 10,000 Lockheed Martin developers and engineers., IBM reported.
Lockheed’s exploitation of IBM’s LLMs suggest that these products are well-suited for use by defense contractors. Consequently, I believe that IBM can make many more such deals over the longer term.
Additionally, IBM is ” developing AI systems capable of actively supporting military decision-makers working closely with national organizations such as DARPA and NATO,” Fergal Glynn, the Chief Marketing Officer and AI Security Advocate of Mindgard, told Clearance obs in an email. Finally, the tech giant is ” is….integrating defense intelligence data with AI in collaboration with companies such as Janes – which helps military analysts get better situational awareness.,” Glynn added.
Mindgard describes itself as “the leader in artificial intelligence testing.”
These initiatives in the defense sector could eventually move the needle positively for IBM’s financial results and IBM stock.
On the profitability front, IBM’s free cash flow rose $100 million in Q1 versus the same period a year earlier to an impressive $2 billion, while its operating gross profit margin advanced 1.9 percentage points year-over-year to 56.6%.
IBM’s Weaknesses and Challenges
The firm’s consulting revenue dropped 2% YOY last quarter, and Defense Department cuts spearheaded by DOGE reportedly could cost the company up to $100 million over the longer term.
Moreover, the firm’s overall revenue advanced just 1% YOY last quarter. However, IBM expects its sales to increase by “5% plus” during all of 2025, Krishna reported in May.
Valuation and the Bottom Line on IBM
Given the strong growth of IBM’s profits and margins, along with its high potential, its forward price-earnings ratio of 26 .8 times is rather low. Another factor that makes its valuation attractive is its sizeable dividend yield of 2.3%.
Additionally, as a result of IBM ‘s large size, huge backlog, long relationships with many firms and government agencies, advancements in AI, and high profits, it will definitely continue to be a huge tech player for many decades to come.
Consequently, long-term conservative investors should take a good look at IBM.
*This article is intended to be informational only; it is not financial advice.
