We recently compiled a list of the 14 Best Consulting Stocks to Buy Now. In this article, we are going to take a look at where International Business Machines Corporation (NYSE:IBM) stands against the other consulting stocks.
After the market rebounded in 2021 post-pandemic, the US consulting industry now faces a complex and uncertain landscape. Rising inflation, increased costs, talent shortages, and supply chain disruptions amid a volatile geopolitical climate are challenging the sector. Despite these hurdles, 66% of clients plan to increase their use of consultants over the next year. However, clients are becoming more cautious, opting for smaller, tactical projects to address immediate issues rather than engaging in lengthy, expensive transformation initiatives. This approach allows them to assess the impact of their investments before committing further. According to the 2023 report by Source Global Research, consulting firms must now deliver results within tighter timeframes amid heightened competition for smaller, sequential project components. Clients are increasingly seeking innovative and data-driven solutions, reflecting a desire for new and novel approaches throughout the project lifecycle. This shift highlights the need for consulting firms to adapt and excel in an environment where macroeconomic challenges have dampened post-pandemic optimism.
In 2021, the US experienced significant growth as clients invested in growth initiatives, buoyed by optimism and capital following the pandemic. However, by the end of 2022, the mood shifted due to rising inflation, energy prices, and political tensions, which hindered business operations and growth opportunities. Clients remain cautious, anticipating a potential global recession. Nevertheless, some clients remain hopeful, with around a third believing that current macroeconomic factors could positively impact their organizations. With technology being a top priority for clients, it’s no surprise that technology firms are leading the market. Clients are investing heavily in technology, which translates into significant consulting spend. Over the past year, two of the top three consulting areas were technology-related: 77% of clients invested in technology strategy and 71% in technology implementation. Productivity improvement, which often involves technology, ranked second at 73%. Although the market is crowded, technology firms are benefiting the most. Clients prefer these firms for their specialized technology solutions, which they believe offer more reliable outcomes compared to other providers, even if it means higher costs.
Uncertainty in the global economy is causing significant disruption in the US consulting industry, with firms dealing with project cancellations and clients pushing for lower fees, reported Financial Times. The report by Source Global Research highlights a major reassessment of consultants by US clients due to economic concerns. Over 75% of professional services buyers have cancelled or scrapped projects, and two-thirds have paused most existing work. The report forecasts 11% revenue growth in 2023, consistent with 2022, but notes increasing pressure on consultants’ fees, with clients now expecting lower rates compared to before the pandemic. Clients are more focused on getting value for money, with only about 50% believing firms provide value above their fees. Areas such as cybersecurity, HR consulting, and M&A for private equity firms are experiencing slowdowns. While IT consulting remains strong, it is targeted at projects that deliver quick financial benefits. The decline in hiring, initially observed in the Big Four accounting and consulting firms, has extended to smaller players as well. According to a survey by investment bank William Blair, job postings by US specialty consultants were down 57% in June 2023 compared to the previous year and have fallen below pre-pandemic levels. At the Big Four, job postings have decreased by 80% year-on-year.
There is one long-term trend that we haven’t talked yet affecting consulting firms positively. The rise of generative AI, a powerful new technology that can create realistic text and images, has sparked a gold rush for consulting firms. Companies like Reckitt Benckiser, unsure of how to leverage this technology, are turning to consultants for guidance. This has led to a surge in revenue for these firms, with some like McKinsey seeing 40% of their business coming from AI-related work. Consulting firms are among the early winners of the AI revolution which is why we believe this may be a good time to invest in consulting stocks. However, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than consulting companies but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
Our Methodology
We leveraged Insider Monkey’s comprehensive database of 920 prominent hedge funds to identify the top 14 consulting stocks with the highest level of hedge fund investment as of Q1 2024. These stocks are listed in order of increasing hedge fund ownership, providing insight into the most popular consulting stocks among elite investors.
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International Business Machines Corporation (NYSE:IBM)
Number of Hedge Fund Holders: 49
International Business Machines Corporation (NYSE:IBM) offers integrated solutions and services globally through its Software, Consulting, Infrastructure, and Financing segments. The Software segment provides hybrid cloud and AI platforms for digital and AI transformations. The Consulting segment focuses on strategy, experience, technology, and operations integration by industry. RBC Capital recently raised International Business Machines Corporation (NYSE:IBM) stock price target to $211 from $200, maintaining an Outperform rating. This follows IBM’s strong performance, including a significant increase in its Generation AI (GenAI) business, which doubled to $2 billion. RBC Capital highlighted IBM’s robust free cash flow (FCF), exceeding expectations and supporting forward guidance through fiscal year 2025. Despite a temporary slowdown in its Red Hat segment, International Business Machines Corporation (NYSE:IBM) management is optimistic about growth in the second half of the year. The improved revenue forecast and FCF outlook for fiscal year 2024 indicate stable performance. The doubling of International Business Machines Corporation (NYSE:IBM) GenAI business to $2 billion underscores its innovation and market position in AI. RBC Capital’s positive outlook on IBM’s trajectory and the increased price target suggest favorable stock value prospects.
In the first quarter of 2024, the number of hedge funds with stakes in International Business Machines Corporation (NYSE:IBM) decreased to 49 from 50 in the previous quarter, according to Insider Monkey’s database of 920 hedge funds. The combined value of these stakes is approximately $1.007 billion. Ken Griffin’s Citadel Investment Group emerged as the largest stakeholder among these hedge funds during this period.
Overall IBM ranks 2nd on our list of the best consulting stocks to buy. You can visit 14 Best Consulting Stocks to Buy Now to see the other consulting stocks that are on hedge funds’ radar. While we acknowledge the potential of IBM as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than IBM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.