Here’s why IBM stock is moving.

IBM shares rose about 6% on Thursday after the company reported solid second-quarter earnings.

Big Blue was in the black on Thursday. IBM Corporation (NYSE:IBM) shares rose more than 6% after reporting second-quarter earnings.

IBM beat analyst estimates for the quarter, reporting revenue of $15.8 billion, up 2 percent from a year ago, beating estimates of $15.6 billion.

Net income rose 14% year over year to $1.8 billion, or $1.99 per share. That missed the median earnings estimate of $2.18 per share, but excluding acquisitions and other costs, IBM beat estimates with adjusted earnings of $2.43 per share, beating estimates of $2.20 per share.

With Thursday’s gains, IBM stock is up about 20% year-to-date (YTD).

Gen AI increases profits

IBM generated most of its revenue from its software business, which grew revenue 7.1% to $6.7 billion for the quarter. Consulting revenue fell 1% to $5.2 billion, while infrastructure revenue rose 1% to $3.9 billion.

IBM Chairman and CEO Arvind Krishna said on an earnings call with analysts that AI, particularly the WatsonX platform, had driven revenue across the business.

Launched a year ago, watsonx is a generative AI platform that enables enterprise customers to train and fine-tune their own AI models.

“We continue to see clients turn to IBM for our technology and expertise in enterprise AI, and our business around generative AI has grown to more than $2 billion since we launched Watson X a year ago,” said Arvind Krishna, IBM Chairman and CEO.

The company also managed to increase its free cash flow to $2.6 billion for the quarter, up from $2.1 billion in the same quarter a year ago. For the first half of this year, IBM accumulated $4.5 billion in free cash flow, $1.1 billion higher than in the first half of 2023.

Additionally, gross profit margin rose to 56.8% from 54.9% in the same quarter a year ago, and operating profit margin rose 110 basis points year-over-year to 14.1%.

“Our strong cash generation allows us to continue to invest in innovation and expertise across our portfolio, while returning value to shareholders through dividends,” said James Cavanaugh, IBM’s senior vice president and chief financial officer.

IBM Raises Free Cash Flow Outlook

IBM has one of the best dividends in the market, and the influx of free cash flow will help maintain it. IBM currently pays $1.67 per share, yielding 3.63%. It has increased its annual dividend every year for the past 24 consecutive years.

IBM maintained its growth forecast for the full year, expecting mid-single-digit revenue growth, but raised its operating margin guidance by half a point and increased its free cash flow estimate to $12 billion.

IBM’s strong second-quarter results prompted several Wall Street analysts, including Stifel, BMO Capital, Jefferies, JPMorgan Chase and RBC Capital, to raise their price targets on the stock.

Still, modest growth is expected, as Stifel, for example, raised it to $205, which is only 6% higher than the current price of $193 per share. JPMorgan just raised it to $195, which is only slightly higher than the current price.

Should I Buy IBM Stock?

IBM stock is a stock to watch for a few reasons. First, it is relatively cheap, with a P/E of 20 and a forecast P/E of 18.

Second, the rapid growth in generative AI platforms is encouraging, growing to $2 billion in business in just one year across multiple segments. Specialization in AI training is a potentially lucrative niche, as more and more companies are using AI and models need to be reliable and stable.

Finally, the company’s impressive free cash flow should allow it to maintain its already generous dividend and invest in the business and technology.

IBM stock is already up 20% YTD, so it’s unclear how much more it can rise in the short term. However, it’s a worthwhile dividend stock to buy and a solid choice to hold for the long term.