International Business Machines stock has enjoyed a great rally as the market warms to its potential in the artificial intelligence space. It has gained a new fan in Evercore analyst Amit Daryanani, who thinks a “messy” AI rollout is good news for IBM, even as other commentators grow cautious.
IBM shares rose 1.9% to $170.08 on Friday. The stock is up 20% in the past 12 months and is at its highest level since 2017, when it peaked at around $175. If it gains just a little more, it will reach prices it hasn't reached since 2014.
The Evercore analyst believes AI adoption can help the stock achieve this goal. He raised his rating on IBM shares from “In Line” to “Outperform” and raised his price target from $165 to $200.
The key lies in the “complicated and messy” implementation of AI tools as companies try to ensure the security of their data, meaning they cannot incorporate it directly into public AI models, says Daryanani.
IBM has avoided consumer-focused AI applications like the chatbots supported by Microsoft and Alphabet, Google's parent company. Instead, through its WatsonX platform, it has positioned itself as a partner for companies looking for a safe way to experiment with the technology.
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“IBM, with its unique consulting and software resources, can help solve this bottleneck and enable enterprise customers to more seamlessly deploy AI tools on- and off-premises,” Daryanani wrote in a research note. “That’s why we believe IBM is an overlooked beneficiary of increasing AI adoption.”
It's not a strategy that has convinced everyone on Wall Street. Brent Thill, an analyst at Jefferies, recently pointed out that the company's software business is still growing slower than its competitors and said IBM could struggle to command a higher valuation if AI growth is dominated by its lower-margin consulting business become. He gave the stock a “Hold” rating and a $180 price target.
Evercore's Daryanani also assumes that the AI boom will initially be felt in IBM's consulting business, but sees no disadvantage in this. He argues that both the consulting and software arms of the company should benefit over time.
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“Any type of initial AI contribution should be visible on the advisory side… and longer term, we believe AI could be a $1 billion advisory practice for the firm,” he wrote.
The split between the two analysts reflects different views on Wall Street. Of the 20 IBM analysts tracked by FactSet, seven rate the stock a Buy or equivalent, while nine rate the stock a Hold. Four recommend selling.
Barron's was positive about IBM's AI plans last year, even though the stock's rally has reduced its dividend yield from over 5% then to around 4% today.
Write to Adam Clark at [email protected]