Markets have staged a fierce rally in the last month, led by typical tech giants like NVIDIA (NASDAQ:), Meta Platforms (NASDAQ:), Microsoft (NASDAQ:), and… wait, is that IBM’s music? Yes, International Business Machines Corp. (NYSE:) has been one of the biggest winners lately and is riding a 10-day winning streak.
However, this rally has actually been ongoing for more than a year. IBM shares have more than doubled in value since the start of 2024, including a 28% year-to-date advance. What’s triggering this impressive rally, and can the gains continue?
Considering its product roadmap, recent earnings, and forward guidance projections, IBM might not be done proving the doubters wrong in 2025.
Party Like It’s 1999: AI and Quantum Computing Fueling IBM Upside
It’s time to bust out the Prince albums, because IBM is experiencing a resurgence that has investors reminiscing about the Dot-Com Bubble days. But unlike many of its Dot-Com contemporaries, IBM has the tailwinds to sustain this surge in the years ahead.
IBM has laid out plans to build the world’s first large-scale “fault-tolerant” quantum supercomputer by 2029. Called the IBM Quantum Starling, the computer is projected to have 20,000 times the operational power of current quantum systems. The computational power of this magnitude could significantly enhance development and productivity across various sectors, including discovering new pharmaceuticals, identifying resources and materials, and optimizing logistics. The roadmap is thorough with clear milestones, such as:
- 2025: Quantum Loom to test architectural components with the Nighthawk processor
- 2026: Quantum Kookaburra combining quantum memory and logic
- 2027: Quantum Cockatoo for scaling the Kookaburra models with a universal adaptor
- 2028: Upgrade the Nighthawk processor (15K quantum circuit gates) to Starling (100M gates)
The Starling launch in 2029 will enable the system to process 100 million quantum operations, preceding the launch of a new processor called Bluejay in 2033. If the roadmap proceeds as planned, the Bluejay processor will enable over one billion quantum operations, representing an exponential increase in processing power within just a few short years.
AI for Enterprises
IBM has also found its niche in the artificial intelligence sector through segments it calls agentic AI. Agentic AI is designed to help large companies and institutions manage workflows and proprietary data within their own confines.
For example, the Granite AI model on the Watsonx platform has been described as a ‘small language model’ since it’s designed for data governance using company materials, documents, emails, and other in-house communications.
By tailoring the AI to enterprise applications, clients can obtain more accurate and detailed information as the datasets come from industry-specific sources.
Think specific legal opinions for a law firm, or balance sheets and cash flow statements for a financial analyst. The Watsonx platform also supports multiple large language models (LLMs), such as Meta’s Llama-2. The AI segment continues to drive profits, with software sales totaling over $6.3 billion in Q1 2025.
The figure represented a 9% year-over-year (YOY) increase supported by 80% recurring revenue through stalwart products like Red Hat. IBM’s addition of HashiCorp (NASDAQ:) to grow its automation portfolio shows that it isn’t resting on its laurels here either.
Strong Earnings and Robust Guidance Extend the Rally
The company reported earnings on April 23 and posted a top and bottom-line beat. The EPS number of $1.60 beat analysts’ expected consensus of $1.42, and revenue of $14.54 billion came in above the expected $14.41 billion. IBM also generated $2 billion in free cash flow, a record for the firm.
The report also noted improving margins, as IBM was able to add 240 basis points to its Q1 EBITDA margin thanks to AI workflow automation and the optimization of supply chains. CEO Arvind Krishna reaffirmed the company’s full-year guidance projections of 5% revenue growth and $13.5 billion in free cash flow generation.
Red Hat’s growth is expected to accelerate to the mid-teens, and the company has issued a slight increase in its Q2 revenue projections to a range of $16.4 billion to $16.8 billion, up from its previous estimate of $16.3 billion.
The stock has received several prominent analyst upgrades since the Q1 earnings release, including three in the last few weeks as the company began laying out its quantum computing roadmap.
Wedbush reiterated its Buy rating for the stock with a $300 price target on May 7. Royal Bank of Canada followed with a $285 price target on May 15 and Bank of America with a $290 price target on June 9. The average of these three new targets is $291.67, which indicates an upside of more than 7% from current levels.
IBM’s Technicals Point to Overextension
Not every signal on IBM is bullish. The daily stock chart indicates that the rally may be getting overextended in the short term, and a more favorable entry point could be available in the days or weeks ahead. The Relative Strength Index (RSI) has floated up into Overbought territory at 74, signalling that a short pullback could be imminent.
The RSI has triggered an Overbought signal twice in the previous six months, and both times it signaled a short-term top, prompting investors to take profits. Better entry points were available in the days following the Overbought signal trigger, and that could be the case once again if IBM’s 10-day rally breaks. Keep an eye on the RSI if you’re looking for an ideal entry point into an IBM position.