Bank of America Merrill Lynch is bullish on IBM (IBM.US): target price raised to $335, high-profit software and cash flow as core support.

Bank of America Corp securities analyst Wamsi Mohan published a research report, raising the target price of IBM (IBM.US) from $315 to $335, while maintaining a "buy" rating. The bank stated that IBM has strong prospects for free cash flow, and the increase in the proportion of high-profit software business will offset the short-term unfavorable factors. After a strong fiscal year in 2025, Bank of America analysts predict a relatively flat year for IBM, mainly due to the weakened performance at the end of the 2025 fiscal year and the challenges facing the 2026 fiscal year. Analysts forecast that when IBM announces its fourth quarter earnings for fiscal year 2025 on January 28th, personnel restructuring measures may lead to a slight narrowing of the pre-tax profit margin. Bank of America expects that expenses related to personnel optimization in the fourth quarter will reach around $400 million, which may limit the expansion of the pre-tax profit margin for the full year 2025 to about 70 basis points, below the management's previous guidance of 100 basis points. At the same time, lower tax rates are expected to partially offset the impact on earnings per share. Looking ahead to 2026, Bank of America predicts that IBM's revenue growth will reach 5%, driven mainly by strong performance in the software business and moderate growth in the infrastructure business. In addition, the acquisition of Confluent (CFLT.US) is expected to bring incremental revenue to the company's software business in 2026, but may have a slight dilutive effect on profits in the short term. "For the 2026 fiscal year, IBM may guide for software business growth of approximately 10% at fixed exchange rates, consulting business achieving low single-digit growth, infrastructure business remaining flat, and overall growth at fixed exchange rates of approximately 5% (organic growth of approximately 4%). We expect the Confluent transaction to be completed mid-year and contribute about 2% of non-organic growth to software revenue. We have adjusted our 2026 fiscal year forecasts to reflect approximately $0.40 earnings per share dilution but minimal impact on free cash flow. We forecast free cash flow for fiscal year 2025 to be $14 billion, and we expect guidance for fiscal year 2026 to be around $15 billion, maintaining a 130% net income to free cash flow ratio. Overall, given the personnel optimization and slowing software business growth, we approach the fourth quarter with caution. However, based on higher profit margins in software revenue, strong free cash flow growth, and potential opportunities from quantum computing, we reiterate our 'buy' rating," summarized Bank of America in the report.