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In the backdrop of a weaker macro environment, the firm anticipates IBM shares to outperform in H2/23, driven by an improving fundamental story. This is supported by positive factors such as better-than-feared revenue growth, favorable FX tailwinds, improved pre-tax margins, FCF uplift, and the benefits of AI, particularly in the Consulting sector with the availability of Watsonx.
According to the bank, H2 commentary will be key for the stock outperformance. The firm believes IBM would need to reaffirm its 2023 guidance, including revenue growth of 3-5% on a constant currency basis, an FCF of approximately $10.5 billion, and a 50-basis point year-on-year improvement in pre-tax income margin.
BofA expects an in-line Q2 as consensus is already modeling tougher compares from last year’s Q2 Mainframe launch, and slower growth in consulting. The firm sees Q2 Consulting revenue of $5.12B, compared to the consensus of $5.08B. “We expect overall software to grow low single digit (3% in 2Q) with Transaction Processing growth of low-mid single digit,” added the firm.
