IBM Stock Could Be More Than a ‘Safe Haven.’ Quantum Computing Is a Big Reason.

IBM stock has outperformed the S&P 500 since late July. (ANDREJ IVANOV / AFP via Getty Images)

Key Points

Evercore ISI says IBM stock is more than a safe haven investment, maintaining an Outperform rating and a $275 price target.
Evercore analyst Amit Daryanani believes a sum-of-the-parts valuation of IBM implies around 17% upside to the $290 price level.
Daryanani valued IBM’s quantum business at $19.69 billion, representing a 75% premium to the next largest quantum peer.

International Business Machines could be much more than just a “safe haven” investment, and its valuation is getting hard to ignore.

That’s the view, at least, from Evercore ISI.

An analyst team led by Amit Daryanani on Friday said that IBM shares have been a “relative outperformer” in recent weeks as concerns surrounding the broader funding of artificial-intelligence infrastructure and potential data-center buildout delays have surfaced.

IBM stock was down 2.2% to $241.80 on Friday after ending Thursday down 2.8%. That decline on Thursday wasn’t too bad considering the Nasdaq Composite tumbled 5.5% and the S&P 500 dropped 4.4%.

Since closing at $206.65 on July 23, IBM stock, as of Thursday, had risen 20%. The S&P 500, for comparison, had fallen about 1% since July 23.

“The outperformance makes sense as investors rotate toward more macro-resistant, safe haven type names such as IBM in a risk-off tape,” Daryanani said.

But the analyst team believes there’s more to IBM than just being a “safe haven” bet by investors. The company’s software, consulting, and infrastructure business segments along with strong free cash flow generation are all positives that point to more upside, according to the firm.

The firm maintained its Outperform rating on the stock along with a $275 price target. That price target represented 11% upside from the closing price on Thursday of $247.11.

Daryanani, however, believes a “sum-of-the-parts” valuation of IBM implies around 17% upside to the $290 price level. Going through a sum-of-the-parts valuation process of IBM, Evercore sees a $316 billion enterprise value along with an equity value of around $276 billion.

While a major reason for this is IBM’s software business, which represents around 45% of the company’s revenue, IBM’s quantum business should also not be underestimated. Daryanani valued IBM’s quantum business at $19.69 billion, around a 75% premium to the “next largest quantum peer.”

IBM’s quantum computing business has been described by some on Wall Street as a “strategic area of differentiation” for the company.

Decades of research have made the company an early technical and commercial leader as well as a go-to partner for the U.S. government. IBM also earned a vote of confidence in early October after advancing to the final phase of a federal quantum benchmarking initiative.

That’s certainly a positive and one of the reasons that Wall Street, along with Evercore, has an optimistic take on IBM even with the company’s persistent struggles with organic growth and decision to lean into software acquisitions in recent years.

IBM stock has an average rating of Overweight, the equivalent of a Buy rating, with price target of $258.68, according to FactSet.

The company gave Wall Street reason for renewed belief after posting better-than-expected third-quarter earnings on Oct. 21.

Morgan Stanley analyst Erik Woodring called the earnings a “bounce back” after a “tough” second quarter. Woodring, however, said the bull vs. bear debate was unchanged and he stuck by his $240 price target and Equal-weight rating.

Bank of America analyst Wamsi Mohan, meanwhile, reiterated his Buy rating and his $280 price target following earnings.

Mohan added that IBM’s “quantum day” event on Dec. 10 is the next big catalyst for the stock, but that it ”remains a defensive story with improving growth and free cash flow.”

IBM might be a safe haven investment for now but that narrative might soon be changing.

Write to Kit Norton at kit.norton@barrons.com

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