In their latest research note, Susquehanna analysts raised a question most tech investors probably have considered at least once: "When do investors need to own IBM for quantum?"
The line of questioning makes sense, considering IBM's quantum division has drummed up plenty of attention in recent months-a bright spot at a time when the stock is under pressure. Second-quarter earnings were the latest reminder of slowing growth in key divisions like IBM's legacy mainframe business, compounded by new threats including customers reallocating their budgets to artificial-intelligence hardware.
While other business lines face headwinds, IBM's quantum division has been a shining star in its portfolio. Susquehanna analyst James Friedman ticked off a number of recent developments including IBM's acquisition of HRL Laboratories to bolster its hardware capabilities and a partnership with the Commerce Department to build Anderon, a standalone quantum chip foundry to serve IBM itself as well as industry players.
Still, it may seem difficult to consider quantum a cornerstone of IBM's business. Although Big Blue has researched the technology since before the turn of the 21st century-and contributed to major scientific breakthroughs along the way-the effort generates paltry revenue. Researchers are banking on big technological advances before the end of the decade to usher in broader commercialization.
Friedman is tempering his expectations. "With a number of upcoming quantum catalysts on the horizon, each deliverable keeps accelerating," he wrote Monday. "At the same time, there is a lot more to getting IBM's fundamentals right as the other segments transform."
The analyst flagged a renewed focus on software within the consulting division, marked by a new leadership appointment, and limited growth in its Red Hat software business due to temporary server supply constraints. There is also the "math of the mainframe cycle" to consider: Revenue was delayed rather than lost, with 40% of the deals that slipped in the second quarter closing early in the following period.
While Friedman remains Neutral-rated on IBM shares, he raised his price target to $235 from $225. The revision reflects upcoming catalysts expected to generate buzz around the technology, particularly the annual Quantum World Congress meeting in late September.
