International Business Machines (NYSE: IBM) has made an impressive debut in 2025, with shares climbing 15% as of the February 6 close. This surge is largely attributed to a recent earnings report that exceeded analysts’ expectations. While IBM might not be the first name associated with AI, it is steadily carving out a significant role in the industry.
The company’s strong earnings highlight the value of its new distilled DeepSeek models, which IBM sees as a crucial part of its strategic vision.
In this article, I will dissect the earnings report in detail and elaborate on the company’s long-term strategy. I will also share my overall opinion on IBM’s stock.
IBM’s Q4 2024 earnings report led to a remarkable 13% increase in its share price within a single day. The reported revenue stood at $17.6 billion, which was in line with expectations but only reflected a 2% growth. The software segment emerged as a key performer, contributing to an 11% rise in sales. This segment focuses on developing solutions that facilitate the management of applications within hybrid cloud environments. Moreover, earnings per share (EPS) exceeded estimates by almost 4% due to a 220 basis point increase in software segment margins.
In terms of AI, IBM reported a striking $2 billion uptick in related bookings when compared to the third quarter of 2024—a 67% increase within just three months. Within its Generative AI (GenAI) segment, 80% of bookings and revenue originated from consulting, with the remaining 20% stemming from software sales.
IBM’s consulting division engages with businesses to help them implement GenAI effectively to enhance their performance. However, the consulting sector witnessed only a 1% growth in the recent quarter. The company attributed this slow growth to clients “reprioritizing their IT budgets towards digital transformation and AI pursuits.” As spending shifts towards AI, IBM’s traditional consulting services seem to be taking a hit. Although revenue from consulting has not flourished yet, the enormous bookings hint at potential future growth as these conversions materialize.
IBM: Leveraging GenAI for Future Growth
Looking ahead, IBM intends to exploit the “flywheel effect.” Approximately 80% of its revenue comes from clients who engage in multiple segments, such as software, consulting, and infrastructure. This means that acquiring a client in one area often leads to broader engagement across the company’s offerings.
The surge in GenAI bookings is particularly promising, hinting at the potential of this rewarding trend. Consulting on GenAI implementation is expected to attract ongoing investment from businesses as they gradually understand the technology’s business applications. Currently, IBM reports that while 98% of organizations have tried AI, only 26% have scaled those tests into active production. As AI continues to evolve, IBM stands ready to meet the growing demands of its clients.
The launch of DeepSeek reinforces IBM’s commitment to specialized language models. The firm aims to create “built-for-purpose” models that excel in specific applications rather than generic functions. Comparing its Granite seven billion parameter model to Meta Platforms’ (NASDAQ: META) Llama 3 70 billion parameter model, IBM asserts that its solution outperformed the competitor’s by 6% in a specific accounting task while costing 75% less. This focused approach positions IBM to address customer requirements at a competitive price point.
Final Thoughts on IBM Stock
Currently, IBM shares are trading at their highest forward price-to-earnings (P/E) ratio seen in the past two decades—approaching 24x. Although this is slightly below the average for the tech sector, the company is growing at a modest 2%. Analysts at Wedbush project an 18% upside in IBM’s stock based on their price targets. There is an undeniable opportunity for IBM in the AI sector, especially as the company potentially capitalizes on the flywheel effect in this domain. A lower valuation would be preferable, but IBM might still maintain its upward momentum even at current price levels.
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The views expressed in this article reflect the author’s opinions and do not necessarily represent those of Nasdaq, Inc.
