On Wednesday, B Of A securities analyst Wamsi Mohan maintained a Buy rating on International Business Machines (NYSE:IBM) with a price forecast of $270.
The rating reflects the analyst’s view that the company is a defensive investment and anticipates improving revenue growth that should, in turn, generate higher cash flow available for reinvestment in further mergers and acquisitions.
In an analyst note that focused on IBM’s transaction processing (TP) software, a critical component of its mainframe operations, Mohan noted TP software has not only stabilized but is now demonstrating significant growth staying extremely relevant in the age of public cloud.
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This growth is driven by strategic innovation, evolving pricing models, and the enduring demand for its unparalleled reliability in mission-critical operations.
The analyst noted that TP software contributes approximately one-third of the company’s total Software segment revenue (over 90% comes from IBM Z/mainframe environments) and generated annual revenues ranging from the mid-$5 billion to over $7 billion over the past decade.
Several factors contribute to the growth of IBM’s TP software, including increased mainframe workloads and innovative pricing models. He asserted in an analyst note that these drivers ensure that IBM remains competitive in the evolving IT landscape.
While Red Hat has often been the primary focus for growth (exhibiting mid-teens growth), TP remains critically important to IBM’s overall revenue expansion and profitability, Mohan noted.
He further said that the company projects this business to achieve mid-single-digit growth, compared to an expected 10% growth for the entire Software segment.
Also, WatsonX integration and innovative pricing strategies have driven greater adoption and improved retention for IBM’s TP software, enhancing its overall stickiness within enterprise environments, he added.
Moreover, the analyst said several IBM Z customers are scaling MIPS to meet rising digital transaction demands, with 70% increasing usage, boosting recurring software revenue.
In 2024, IBM noted about 4 points of transaction processing revenue growth came from higher workload consumption fueled by mobile banking, e-commerce, and data-driven activity.
Mohan added that IBM’s Enterprise License Agreement (ELA) approach for its TP software has been central to boosting its adoption and financial consistency.
Overall, the analyst believes that ELAs have strengthened IBM’s capacity to retain clients and consistently grow transaction processing revenue by deeply integrating IBM’s software into customer operations and strategic planning.
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