Artificial intelligence (AI) has emerged in recent months as a key contributor to a company's success. Microsoft CEO Satya Nadella called AI "the next major wave of computing."
Among the organizations developing AI technology is International Business Machines (IBM 0.06%), which possesses a long history in the field, stretching back to the 1950s. It made headlines in 1997 when its AI efforts, personified in the Deep Blue computer, beat the reigning chess champion, becoming the first computer in history to do so. IBM followed this up in 2011 with its Watson computer, which defeated some of the best players of the game show Jeopardy!.
This brings us to today's IBM. It's important for investors to understand how AI contributes to IBM's success given AI's significance to the tech industry. Here's a look into the company's use of AI to help you evaluate if Big Blue makes a good long-term investment.
IBM's use of artificial intelligence
After he became CEO in 2020, Arvind Krishna coalesced IBM around the twin pillars of AI and cloud computing. The two technologies are intertwined, since AI requires massive amounts of data for decision making, and the cloud provides the infrastructure to store and easily access that data.
While competitor Microsoft captured headlines earlier this year for integrating AI into its consumer-facing Bing search engine, IBM focuses on AI for businesses. As Krishna explained on the first-quarter earnings call, "AI for business is different than AI for consumers given their need for more accurate results, trusted data, and governance tools."
IBM has worked with companies to boost productivity and reduce costs through AI-enabled technologies. For example, IBM is using artificial intelligence to automate the drive-through experience for McDonald's and the remittance of pension benefits for the U.S. Department of Veterans Affairs.
IBM also introduced computer servers with integrated AI capabilities last year. Called the IBM z16, the latest in the company's line of zSystems servers, they help organizations analyze massive amounts of business activity to identify and deliver key insights in real time, such as examining credit card transactions for fraud.
How AI affected IBM's financial performance
These achievements contributed to IBM growing 2022 revenue to $60.5 billion, a 6% increase over 2021. IBM's streak of year-over-year growth extended into the first quarter of this year, reaching $14.3 billion compared to $14.2 billion last year.
Big Blue's software division, where its AI and cloud computing revenue resides, saw a 2.6% year-over-year revenue increase in Q1, accounting for $5.9 billion of the quarter's $14.3 billion. Its infrastructure segment, which includes z16 server sales, added $3.1 billion in Q1 as zSystems revenue jumped 11% over 2022.
In addition, IBM's Q1 gross profit margin increased to 52.7% over last year's 51.7%. The company's profit margins were helped by its own AI adoption for its operations. For instance, the company's human resources department employed an IBM-developed virtual assistant with AI to speed up HR-related tasks by 75%.
The company expects these types of productivity-boosting initiatives to capture $2 billion in annual savings by the end of 2024. These efforts already helped IBM increase Q1 net income to $927 million, up from the prior year's $733 million.
IBM as an AI investment
IBM is seen as one of the AI tech leaders by research firm Gartner. This recognition will help Big Blue continue to capture share in the AI market, an industry expected to grow from $142.3 billion in 2022 to $1.8 trillion by 2030.
Adding to its AI competencies are IBM's solid financials. At the end of Q1, the company had total assets of $133.6 billion compared to total liabilities of $112 billion. Its Q1 free cash flow (FCF) reached $1.3 billion, up from $1.2 billion in 2022. IBM expects FCF to hit $10.5 billion in 2023, an increase of more than $1 billion from last year.
FCF is essential to funding IBM's high-yield dividend, currently at 5.3% at the time of this writing. Big Blue's dividend track record is another element making an investment in the company attractive. IBM has paid consecutive quarterly dividends since 1916, and increased its dividend for the past 28 years.
These factors make Big Blue a compelling investment. And with the secular trend of AI still in its early days, as businesses ramp up AI adoption, IBM is well positioned to continue growing its revenue, making IBM among the best AI stocks to buy for the long run.
