Why IBM Stock Soared 16% in September

Key Points

• IBM's growing enterprise AI business is well positioned as AI investments soar.

• The company made a quantum computing breakthrough in September -- another step toward turning the technology into a meaningful business.

• 10 stocks we like better than International Business Machines ›

A tailwind from the artificial intelligence (AI) boom, along with an apparent breakthrough in quantum computing, helped push IBM (NYSE: IBM) stock back to near-record levels in September. IBM stock gained 15.9% last month, according to data provided by S&P Global Market Intelligence, largely erasing the losses suffered over the summer.

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AI and quantum computing

IBM's AI business doesn't generate a lot of headlines, but the company has quietly become a powerhouse in the industry by focusing on enterprise solutions. IBM has booked more than $7.5 billion worth of generative AI business so far. The combination of consulting and software, as well as various strategic partnerships with other technology companies, allows IBM to offer complete AI solutions that include integration and implementation services, and that use the third-party cloud platforms that enterprise clients have already embraced.

While there hasn't been any meaningful news coming out of IBM's AI business over the past month, the AI industry has seen a frenzy of major developments. OpenAI and Oracle struck an enormous AI computing deal, Nvidia announced a $100 billion investment in OpenAI, and the Stargate project signed agreements with memory chip manufacturers to supply gargantuan quantities of chips. For IBM, a rising tide lifts all AI boats.

Outside of AI, IBM and HSBC announced a significant breakthrough in the field of quantum computing in September. HSBC used IBM's quantum computers to demonstrate a meaningful improvement over classical computers for a specific computational problem related to bond trading. Quantum computing was paired with classical techniques to deliver a 34% improvement in predicting how likely a trade in the over-the-counter European bond market would be filled at a quoted price.

While large-scale, fault-tolerant quantum computers are still years away, IBM is making progress applying the technology to real-world use cases. IBM has already generated around $1 billion in bookings related to quantum computing, but the quantum computing industry could reach $198 billion by 2040, according to estimates from McKinsey.

Accelerating growth

IBM's AI business is one reason why the company's revenue growth is set to accelerate this year. IBM expects revenue adjusted for currency to grow by at least 5% in 2025. While this may not seem impressive, it's important to remember that IBM is a sprawling company with a mix of legacy businesses and faster-growing businesses.

Another factor: Demand for discretionary tech projects is weak, given the state of the economy, which is offsetting some of the company's AI and cloud-driven growth.

AI should continue to drive IBM's revenue higher even if the hype around the technology starts to fizzle out. Since IBM focuses on enterprise AI solutions that cut costs or boost efficiency, often with small, specialized AI models, the company isn't dependent on frontier models improving dramatically. Beyond the next few years, quantum computing can start to have an impact as IBM pushes forward on its quantum roadmap.

With IBM expecting to generate at least $13.5 billion in free cash flow this year, the stock trades at a price-to-free cash flow ratio of about 20. While that's certainly not bargain territory, the company's long-term opportunities in AI and quantum computing justify the valuation.

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HSBC Holdings is an advertising partner of Motley Fool Money. Timothy Green has positions in International Business Machines. The Motley Fool has positions in and recommends International Business Machines, Nvidia, and Oracle. The Motley Fool recommends HSBC Holdings. The Motley Fool has a disclosure policy.