AI is devouring the software industry! Melius Research claims that infrastructure software companies are more resilient, maintaining a "buy" rating for IBM (IBM.US).

Ben Laitz, Head of Technical Research at Melius Research, stated that as artificial intelligence disrupts traditional software businesses, infrastructure software companies are standing out. After IBM released its latest financial report showing organic growth in its software business accelerating on a quarter-over-quarter basis, Laitz pointed out that the company is a typical example of this shift. He maintains a "buy" rating for IBM with a target price of $390. "AI is eating away at software. You are witnessing this firsthand," Laitz said in an interview. "This is a viewpoint we have been emphasizing for the past two years. IBM is an infrastructure software company with stable recurring revenue streams, and its growth is accelerating on a quarter-over-quarter basis." Laitz contrasted infrastructure software companies with struggling SaaS (Software as a Service) companies. He believes that companies "sitting at the underlying pipes and processing data connections" will continue to outperform traditional software providers, who are threatened by generative AI tools. When discussing the disruption brought by AI models like Claude, Laitz was straightforward, stating, "Even kindergarten kids can see that it threatens the software industry." The analyst's $390 target price is based on the enterprise value-to-free cash flow (EV/FCF) metric. Laitz believes that IBM deserves a higher premium valuation compared to SaaS companies because of its higher quality free cash flow; in contrast, competitors often rely on non-GAAP measures and "their stock count is trending towards infinity due to a large number of stock options being issued." Laitz also highlighted IBM's disciplined capital allocation and noted that the company has "proven that they can utilize free cash flow for acquisitions, adding value to their infrastructure software business." Furthermore, he pointed out that IBM's efforts in quantum computing are a long-term catalyst that has not yet been reflected in the stock price. "Besides IBM and a few other companies, there are no investable assets left in the software space," Laitz concluded. This further reinforces his viewpoint that IBM is one of the few attractive choices in the software industry facing survival pressure from AI.