According to Ben Reitzes, Head of Technology Research at Melius Research, as artificial intelligence disrupts traditional software businesses, infrastructure software companies are emerging as standout performers. Following IBM's latest earnings report, which showed a quarter-over-quarter acceleration in organic growth for its software segment, Reitzes pointed to the company as a prime example of this shift. He maintained a "Buy" rating on IBM with a price target of $390. "AI is eating software. You are witnessing it firsthand," Reitzes stated in an interview. "This is a theme we have been emphasizing for two years. IBM is an infrastructure software company with a stable, recurring revenue stream, and its growth rate has accelerated sequentially."
Reitzes drew a sharp contrast between infrastructure software companies and the struggling SaaS (Software-as-a-Service) industry. He believes companies that are "in the underlying plumbing and handle data connectivity" will continue to outperform traditional software vendors, who are increasingly threatened by generative AI tools. Discussing the disruption caused by AI models like Claude, Reitzes was blunt: "It's obvious to a kindergartener; it threatens the software industry."
The analyst's $390 price target is based on the enterprise value to free cash flow (EV/FCF) metric. Reitzes argues that IBM deserves a higher premium valuation compared to SaaS companies because its free cash flow is of "higher quality"; in contrast, competitors often rely on non-GAAP metrics and, "due to significant stock option grants, their share count tends towards infinity."
Reitzes also highlighted IBM's disciplined capital allocation, noting the company has "demonstrated its ability to use free cash flow for acquisitions that add value to its infrastructure software business." Furthermore, he pointed to IBM's efforts in quantum computing as a long-term catalyst that is not yet reflected in the stock price. "Outside of IBM and a few others, there are no configurable assets left in software," Reitzes concluded. This observation further reinforces his view that IBM is one of the few attractive choices in a software industry facing existential pressure from AI.
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