There may be no other company that has been working on artificial intelligence (AI) longer than International Business Machines (IBM -1.05%). As Bank of America analysts noted last week, IBM has been building specialized AI applications for decades. The company's highest-profile AI achievement was its 2011 win on Jeopardy! with its Watson system, which could understand natural language.
IBM's attempts to turn Watson into a real business over the years have largely failed. The company talked up the potential for AI in the healthcare industry, but it sold its Watson Health business after that potential went unrealized. The company has since pared back its ambitions, mostly focusing its AI efforts on helping its clients improve their own operations.
A multibillion-dollar opportunity
While IBM's attempts to turn Watson into a household name fell flat, the company is well positioned to be a major player in the AI market. IBM trotted out the Watson name earlier this year with its new watsonx platform, but the company's strategy is very different this time around. The original incarnation of Watson was a solution in search of a problem. This new platform enables clients to build, train, and deploy large language models while maintaining control of their data. Much like the rest of IBM's business these days, watsonx is aimed at helping clients do things better.
The BofA analysts see AI as the key to IBM's ongoing turnaround, calling the company's AI portfolio "underappreciated." AI is complicated, especially for large organizations that must take data privacy, compliance, and regulatory issues into account. On top of selling software in the form of the watsonx platform, IBM's vast consulting business should benefit from increasing demand for AI guidance and know-how.
IBM announced that its consulting division had established a Center of Excellence for generative AI earlier this year, complete with more than 1,000 consultants with generative AI expertise. While IBM's consulting business will push some customers to the watsonx platform, the company also has partnerships with other technology providers.
The AI opportunity in consulting alone is significant. The BofA analysts expect AI to contribute $1 billion in consulting revenue in 2024 and $2 billion in 2025. For reference, IBM's consulting segment generated $19.1 billion of revenue in 2022. It may take longer for AI to meaningfully boost IBM's software revenue, but there should be plenty of demand in the coming years from enterprises looking to deploy advanced AI models.
An attractive stock
While IBM isn't going to ever grow as fast as Nvidia, which leads the market for AI chips, the company's AI efforts should help drive solid, sustainable growth in the long run. The BofA analysts maintained a $160 price target on the stock, which is about 12% higher than the current stock price.
Outside of AI, IBM's portfolio of products and services should hold up in nearly any economic environment. IBM is seeing sustained demand for transformational projects that deliver meaningful cost savings or boosts to productivity. While the appetite for big tech projects during tough times can be understandably muted, the exception is when there's a clear return on investment.
With IBM expecting to generate $10.5 billion in free cash flow this year, the stock trades for just over 12 times that metric. The company also pays a generous dividend. Based on the most recent dividend payment, IBM stock currently yields about 4.7%.
IBM has been on a long journey to turn its vast experience with AI into a real, revenue-generating business. By helping clients take advantage of the latest AI advancements, and by providing a software platform to make deploying AI models simple, IBM looks like it's finally on the right track. Over the next few years, AI has the potential to add billions of dollars to the company's top line.
