Key Focus Areas for Investors in IBM's Earnings Report

IBM's upcoming second-quarter earnings report is generating interest among analysts, who are focusing on revenue-generating aspects of the company's business rather than its AI initiatives. One area of attention is IBM's open-source software platform, Red Hat. Analyst David Vogt from UBS expresses caution about the potential for Red Hat's growth in the second half of the year. Vogt emphasizes the importance of monitoring Red Hat's performance, as it is expected to contribute to a significant portion of the projected software growth in 2023. Concerns arise from cautious commentary by other Linux companies, indicating potential delays and shorter contract lengths.

Red Hat has faced criticism for its new source-code policies, which reportedly create challenges for creating compatible operating systems with Red Hat Enterprise Linux, as reported by ZDNet.

Although IBM promotes its WatsonX enterprise-AI offering, JPMorgan analyst Brian Essex does not anticipate substantial financial contributions from WatsonX in the near term. Essex believes that evidence of traction is necessary before considering an AI contribution, given IBM's mixed results with traditional AI efforts in the past. Essex rates IBM shares as neutral, providing a target price of $145.

Stifel analyst David Grossman believes it is premature for WatsonX to significantly impact growth. However, he sees WatsonX as a solid open-AI platform that integrates IBM's core technologies. Grossman suggests that IBM's legacy Watson initiative, increasing security concerns, and enterprise positioning will give the company a presence in the enterprise AI landscape. He recommends IBM as a defensive market hedge for dividend-sensitive investors, with a buy rating and a target price of $140.

In late June, IBM confirmed the acquisition of cloud-based business software company Apptio for $4.6 billion in an all-cash deal. Grossman estimates that Apptio could contribute up to 40 basis points to software growth and less than 20 basis points to IBM's overall growth rate.

According to FactSet data, IBM is expected to report second-quarter earnings of $2.02 per share on revenue of $15.57 billion. This compares to earnings of $2.31 per share and revenue of $15.54 billion in the year-ago period.