International Business Machines (IBM) reported another quarter of strong free cash flow thanks to its data and mainframe businesses, Morgan Stanley said in a note Thursday.

"While RedHat was once the key growth asset dictating IBM valuation, this is shifting as RHT decelerates," the report said

RedHat growth slowed to 8% year over year, the weakest pace in six quarters, while consulting revenue growth also decelerated despite an easier comparison, the note said, adding that the Q4 EPS beat was driven entirely by a lower tax rate.

The report said free cash flow is now the key valuation indicator as it delivered its third consecutive Q4 FCF beat. It added that there is a potential for IBM to raise its 2026 FCF guidance above $16 billion in the coming months.

"Said differently, despite the blemishes this quarter, IBM is delivering fundamental outperformance where it needs to in order to support a premium multiple," the note said.

Morgan Stanley raised its price target on the stock to $304 from $252 while keeping its equalweight rating.

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