Will IBM be a trillion dollar stock by 2030?

International Business Machines (IBM 2.46%) may finally be ready for a comeback. The stock finally broke its 2013 all-time high this year, and with its transformation into a cloud and artificial intelligence (AI) company, investors have taken interest.

This gave IBM a market capitalization of about $205 billion. Given its trajectory, that figure will likely continue to grow, so much so that some investors may speculate whether it can become a trillion-dollar stock by 2030. While no one knows for sure whether it can reach that level, it likely it’s worth taking action. a closer look to assess the potential of such an event.

IBM status

First, investors should realize that taking a $205 billion market cap to $1 trillion in six years will require an average share price increase of 30% annually over the next six years.

In the previous decade, achieving such a goal did not seem likely. However, thanks to its metamorphosis, IBM has become a fundamentally different company over the past five years. The transformation began in earnest when Arvind Krishna, then head of IBM’s cloud and cognitive software division, led the $34 billion acquisition of Red Hat.

This acquisition meant a massive increase in IBM’s total debt. So large was that debt that a failure would likely have cast doubt on IBM’s future.

Still, IBM seemed to believe enough in Krishna’s vision that the company elevated him to CEO the following year, and it seems the gamble paid off. Krishna went on to acquire numerous smaller cloud companies and split the managed infrastructure business Kyndryl.

That gave IBM a 2 percent market share in the cloud infrastructure market, according to Synergy Research Group. While this may not sound significant, Grand View Research estimates that the global cloud market will grow to $2.4 trillion by 2030. So if it just maintains this percentage, it could mean a massive increase in income during that time.

Image source: Statista.

In addition, IBM’s more prominent role in the cloud has made the company a player in the emerging generative AI market with watsonx. In the year since the company launched watsonx, IBM’s book of business in generative AI has grown to more than $2 billion. Grand View Research predicts the market will reach $109 billion by 2030, a compound annual growth rate (CAGR) of 37%. This could bode well for IBM’s generative AI platform if it can approach that growth.

This does not mean that IBM has become only a cloud and AI company. Just over half of its revenue comes from its consulting and infrastructure segments. However, the largest segment remains software, which plays a critical role in the modern technology industry.

IBM Finance

Unfortunately, the company’s overall growth rate may leave investors wondering if it can reach a $1 trillion market cap in the next six years.

In the first half of 2024, revenue was just over $30 billion, up just 2% from a year ago. Software, which accounted for 42% of total revenue, grew by just 6%. Consulting and infrastructure, which account for almost all of the remaining revenue, did not see significant growth.

However, net income for the first two quarters of 2024 was $3.4 billion, a 37% year-over-year increase. An income tax benefit of $112 million (compared to a tax payment of $543 million in the first half of 2023) gave IBM a critical reduction in income taxes, allowing the company’s profit to grow significantly.

Unfortunately, this benefit is unlikely to be repeated in future years. While IBM raised its guidance for mid-single-digit revenue growth for the year, it may not be enough to inspire a rapid rally in the stock price.

Moreover, the share price has increased by almost 60% in the past year, taking the share price to the aforementioned record high. That brings the P/E ratio into the 25 range. While that might seem reasonable, IBM hasn’t typically seen higher valuations than during periods of declining profits. This may not bode well for its rapid growth prospects.

Will IBM be a $1 trillion stock by 2030?

Given IBM’s current financial trajectory, a $1 trillion market cap in the next six years seems unlikely.

Despite this modest prediction, IBM is back in action — at least from a technical perspective. Thanks to its presence in the cloud and watsonx, it is once again a major force in the tech industry and that bodes well for the stock.

However, even as revenue growth increases in the mid-single digits, it may experience slower growth than some of its industry peers.

Additionally, the income tax benefit that triggered the 37% increase in net income is a one-time event. With profitability likely to decline as income tax payments resume, IBM will likely struggle to generate the profit growth needed to reach $1 trillion over the next six years. Big Blue’s investors should set their sights a little lower.