A skeptical market is finally starting to take notice of the International Business Machine. (NYSE:IBM) As a leading company in the artificial intelligence (AI) market. As a result, IBM’s stock price rose 37% in 2024, outpacing the market. The total return after reinvesting dividends is 44%.
Is Big Blue still a buy after this rapid rally, or is the growth engine running out of rocket fuel? A look at where the company and stock are positioned just before 2025 Let’s see.
At first glance, IBM’s recent performance may not seem all that impressive.
In its recent third quarter report, sales increased by just 2% year over year. The overall revenue increase was explained by currency effects. Final earnings per share (EPS) increased 5%, due in part to a slightly lower tax rate. Are you bored of going to bed already? This is a safe and stable report, roughly in line with analyst expectations, with little to be excited about.
But dig deeper and you’ll find that IBM’s mediocre results are actually impressive. The robust Infrastructure segment saw revenue decline 7% due to a 19% decline in the highly cyclical IBM Z mainframe business. This division waxes and wanes with mainframe product cycles, with the next update for IBM Z systems scheduled for 2025. That release should include even more AI capabilities powered by IBM’s custom AI chip.
Balancing this cyclical headwind, IBM software and services carried their weight. Automation revenue increased 13%, Red Hat’s hybrid cloud business increased 14%, and AI revenue increased 5%.
This is also an unfortunate number. AI should be a major growth driver, not a modest single-digit revenue boost. So it’s great to see other businesses making up for predictable mainframe slowdowns. But why has AI growth been so limited?
The problem is, IBM won’t sell quickly. Instead, set up long-term subscription and technical support agreements. The setup phase can be very slow, especially for complex ideas like setting up a generative AI system. Many prospects go through several rounds of technical testing, executive approval, and a budget process before signing on the dotted line.
But it would give IBM a lucrative long-term customer base.
The company launched a generative AI platform called watsonx in the spring of 2023. One year later, watsonx has amassed a multi-year contract worth more than $2 billion.
One quarter later, watsonx’s order book grew by another $1 billion. This is a 50% increase in orders in three months, also known as the tipping point. Big Blue plans to convert these paper contracts into cash sales over time, while also signing more AI contracts.
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This dynamic has become much more apparent since the introduction of watsonx. This is how IBM works, and we’re seeing the company finally take advantage of a strategic shift that took nearly a decade to make.
And next year’s AI-enhanced System Z mainframes will represent the bullish half of a multi-year business cycle. Adding this business driver to your AI contracting activities should result in a surge in sales and strong cash flow.
“Our portfolio is well positioned for an upward curve in growth in 2025,” IBM CEO Arvind Krishna said on the company’s third-quarter earnings call. That’s an understatement to say that IBM’s results should impress Wall Street next year.
Due to the recent rise in stock prices, the stock’s valuation ratio has also increased. Unfortunately, that’s how mathematics works. But IBM stock still looks reasonably priced compared to other AI giants, especially when you focus on the all-important cash benefits. Whether you measure each stock by price to sales or price to free cash flow, Big Blue is a bargain next to Nvidia and Microsoft.
AI stock
Price vs. Free Cash Flow (TTM)
Price to Sales (TTM)
Market capitalization
IBM
16.5
3.3
$207 billion
Nvidia
58.3
29.1
$3.3 trillion
microsoft
44.7
12.8
$3.2 trillion
Data retrieved from Finviz.com on December 20, 2024. TTM = 12 months tracking.
I’m excited about the AI boom and don’t mind taking a slow approach to investing in that revolutionary revolution. Therefore, we highly recommend acquiring IBM stock while it is cheap. Nvidia and Microsoft can wait.
Next year’s business growth should far outpace the modest growth in 2024, especially if you keep an eye on IBM’s promising WatsonX deal.
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*Stock Advisor returns as of December 16, 2024
Anders Bylund holds positions at International Business Machines and Nvidia. The Motley Fool has positions in and recommends Microsoft and Nvidia. The Motley Fool recommends International Business Machines and recommends the following options: A long January 2026 $395 call on Microsoft and a short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
Should you buy this artificial intelligence (AI) stock by 2025? Originally published by The Motley Fool
