Why Stifel Sees IBM as a “Safe Compounder” in AI

Core Viewpoint - IBM is recognized as a significant player in the AI sector, with analysts highlighting its potential for growth and stability, particularly through software-led initiatives and margin expansion [1][2]. Group 1: Stock Performance and Valuation - Stifel analyst David Grossman has reiterated a Buy rating on IBM with a price target of $325.00, viewing it as a safe compounder benefiting from software-led growth and margin expansion [1]. - IBM is currently trading at a 40% premium to the equal-weight S&P 500 multiple, which aligns with its long-term average range of 20-55%, but is above the pre-2025 trend of around 10-20% [2]. Group 2: Growth Projections - Stifel anticipates organic software growth of approximately 7-8%, consistent with expected performance in 2025, with software acquisitions expected to provide additional growth tailwinds into 2027 [3]. - Services fundamentals, which account for about 32% of IBM's revenue, are seen as bottoming out and showing signs of modest improvement [3]. Group 3: Margin Expansion and Estimates - There is continued potential for margin expansion in 2026 and 2027, with Stifel maintaining its 2026 estimates, which are largely in line with consensus [4]. - The Confluent acquisition has not yet closed and is not reflected in estimates, but it is expected to be modestly dilutive to 2026/2027 EPS and free cash flow [5]. Group 4: Financial Estimates - The company is maintaining its 2026 estimates with revenue growth of 4%, constant currency margins increasing by 75 basis points, EPS growth of 8% to $12.23, and free cash flow growth of 7% to $15 billion [5]. - A stronger USD has reduced the 2026 foreign exchange tailwind from 90 basis points to 40 basis points [5].