IBM a ‘hidden AI play’ but upside is capped – Jefferies

Jefferies analysts initiated shares of IBM (NYSE:) at Hold in a note Friday with a $180 per share price target, saying that while they are encouraged by software momentum, there is no breakout play.

The note states that Jefferies likes the “transformative moves” IBM has taken to reposition itself as a software-led story, including the Red Hat acquisition, Kyndryl spinoff, and investments in AI and its software GTM.

In addition, Jefferies believes IBM is a “hidden AI play” that has more legs in consulting than in software.

“With the Watson platform, IBM will have plenty of exposure to Gen AI workloads. However, we see the bigger near-term AI opportunity in its strategic consulting arm given the majority of customers are still early in their Gen AI strategies and will need help on how to effectively use these technologies,” analysts said.

Despite the positives, Jefferies notes that the company is growing revenue below its software peers while operating at lower margins. “While the stock can grind higher, we think upside is capped in the absence of a meaningful acceleration in software,” analysts wrote.