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Is IBM Poised to Lead the Dow Over the Next Year?

Nathaniel StoneThursday, May 1, 2025 4:20 am ET

14min read

IBM’s recent performance highlights its transition from a legacy tech giant to a software and AI-driven enterprise. With generative AI adoption surging and strategic acquisitions bolstering its cloud capabilities, the company is positioning itself for sustained growth. But can ibm outpace its Dow peers over the next 12 months? Let’s dissect the data.

IBM’s Recent Performance: Software Strength vs. Infrastructure Struggles

IBM’s Q1 2025 results revealed a mixed but promising picture. Total revenue grew 1% YoY to $14.5 billion, driven by software segment dominance, which surged 7% to $6.3 billion. Key software divisions like hybrid cloud (up 12%), automation (14%), and data (7%) signaled strong demand for enterprise tech. The $6 billion generative AI “book of business”—a metric combining software transactions, SaaS contracts, and consulting deals—underscores its leadership in AI-driven enterprise solutions.

However, challenges persist. The Infrastructure segment fell 6% YoY due to the end of the z16 mainframe cycle, while Consulting dipped 2% amid federal contract delays. These headwinds are expected to ease: the newly launched z17 mainframe, featuring AI acceleration and energy efficiency, should revive infrastructure sales, and a $100 million revenue hit from U.S. federal budget delays is likely temporary.

Margin Expansion and Cash Flow: A Resilient Foundation

IBM’s profitability improved significantly. Gross margins rose to 55.2% (GAAP) and 56.6% (non-GAAP), driven by software’s high margins and cost discipline. Free cash flow hit $2.0 billion in Q1, up $100 million YoY, with a full-year target of $13.5 billion reaffirmed. With $17.6 billion in cash and marketable securities, IBM has the liquidity to invest in R&D and acquisitions—like its $6.4 billion purchase of cloud automation firm HashiCorp—without overleveraging.

How Does IBM Stack Up Against Other Dow Stocks?

The Dow’s top performers in 2024-2025 have shifted from tech-driven gains (Nvidia’s 2024 surge) to defensive and value plays. For example:- UnitedHealth Group rose 15% in April 2025 due to Medicare Advantage tailwinds.- Goldman Sachs and JPMorgan leveraged strong Q4 2024 results in financial services.- Chevron faced volatility tied to energy demand and tariffs.

IBM’s software-led AI strategy offers a unique advantage. Unlike pure-play tech stocks (e.g., Nvidia), which face commoditization risks, IBM’s diversified revenue streams (software, consulting, infrastructure) and recurring revenue (80% of software sales) provide stability. Its $21.7 billion in software ARR and hybrid cloud growth (OpenShift ARR up 25%) further insulate it from macroeconomic swings.

Key Drivers for Outperformance

AI Momentum: The $6 billion AI book represents 80% of consulting’s backlog, with demand driven by enterprise adoption of AI for application modernization and data management.
Strategic Acquisitions: HashiCorp’s integration into IBM’s cloud portfolio strengthens its automation capabilities, while the DataStax acquisition (terms undisclosed) enhances hybrid cloud scalability.
Margin Discipline: Gross margins expanded 170 basis points YoY, signaling operational efficiency that can offset infrastructure softness.

Risks to Consider

Infrastructure Turnaround: The z17’s success is critical to reversing the 6% YoY decline in infrastructure. If adoption stalls, revenue could lag.
Consulting Volatility: Federal budget delays cost $100 million in Q1, and discretionary spending cuts could hurt consulting margins further.
Macroeconomic Uncertainty: A recession or prolonged IT spending freeze could dampen demand for enterprise software and AI solutions.

Conclusion: IBM’s Case for Being the Best Dow Stock

IBM’s software and AI engines are firing on all cylinders, with $6.3 billion in software revenue and $13.5 billion in projected free cash flow positioning it for growth. While infrastructure and consulting face near-term headwinds, the z17 launch and AI-driven consulting backlog suggest these segments will rebound. Comparatively, IBM’s balanced portfolio and recurring revenue model offer better stability than cyclical stocks like Chevron or pure tech plays like Nvidia.

The Q2 2025 guidance—revenue of $16.4–16.75 billion, exceeding consensus—supports optimism. If IBM meets its 5% constant currency revenue growth target for 2025, it could outpace many Dow peers still grappling with sector-specific risks.

Final Verdict: IBM is a top contender for the best Dow stock over the next 12 months, provided its infrastructure turnaround and AI momentum sustain. Investors should monitor Q2 results and z17 adoption closely, but the data suggests a compelling risk-reward profile for bulls.

Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.