MW IBM's stock is beating Big Tech this year. Why this analyst sees more gains ahead.

By Britney Nguyen

AI may pose a threat to software companies that charge customers per seat or employee, but IBM offers relative stability in part due to a different business model

Shares of International Business Machines Corp. are outperforming Big Tech stocks so far this year - and some analysts see more room for IBM's stock to rally, especially compared with its fellow software names that are facing threats from artificial intelligence and geopolitical tensions.

IBM's stock $(IBM)$ has climbed 33% so far this year as of midday on Monday, besting Meta Platforms Inc.'s stock $(META)$, which is up more than 23%; Microsoft Corp.'s stock $(MSFT.UK)$, which is up 18%; Nvidia Corp.'s stock (NVDA); which is up more than 17%; and Amazon.com Inc.'s stock $(AMZN.UK)$, which is up just over 1%. Meanwhile, Apple Inc. $(AAPL)$'s stock is down 16% so far this year, and Alphabet Inc.'s $(GOOGL)$ is down almost 7%.

Analysts at Melius Research, led by Ben Reitzes, said in a note to clients on Monday that IBM occupies a unique spot in the software landscape and can depend on the "stability" of its infrastructure software business. That will lead to "multiple expansion as long as the results roll in," meaning the stock could come to trade at a higher valuation.

The company's "software is harder to get rid of and largely priced by usage or by instances," the analysts said, while software-as-a-service companies that depend on paid seats are "undeniably threatened by the rise of AI."

As growth rates for some software-as-a-service companies including Adobe Inc. $(ADBE)$, Salesforce Inc. $(CRM.AU)$ and Workday Inc. (WDAY) slow down, "investors are likely to grow more frustrated by their inability to monetize AI," the Melius team said. With that backdrop, there are ever fewer software stocks that can offer the sort of stability investors crave, they added.

The analysts said there will likely be more growth in cloud leaders such as Microsoft or Oracle Corp. (ORCL), or infrastructure-software companies such as IBM and Broadcom Inc. (AVGO).

Other software companies that show growth potential such as Cadence Design Systems Inc. (CDNS) and Synopsys Inc. (SNPS) "have exposure to geopolitical risks (even if those wane a bit with trade deals)," the analysts said.

See more: These chip-design software stocks are climbing after a U.S.-China trade deal

IBM, Broadcom and similar companies are also positioned well for the "'roll-up' model that rewards companies for tuck-in acquisitions that augment the consistency of the portfolio," the analysts said.

"Since most investors view Broadcom to be an AI [semiconductor] play, IBM increasingly seems unique - and seen as a relatively safe alternative," Melius said, adding: "It really isn't that surprising that IBM garners a higher multiple these days, which could even expand a little more."

The Melius team believes it is possible for IBM to end the year with double-digit growth in revenue for its infrastructure-software business, which would lead to a higher multiple of 23x enterprise value to estimated free cash flow for 2027. That would be "a premium" compared with top SaaS companies that currently trade at about 20x, the analysts said, "but still ... a significant discount to faster-growing cloud leaders Microsoft and Oracle."

-Britney Nguyen

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

July 07, 2025 13:28 ET (17:28 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.