Plenty of tech stocks saw their prices rise in 2023 thanks to the popularity of artificial intelligence (AI). One of the beneficiaries of Wall Street's AI infatuation is International Business Machines (IBM -1.05%). IBM's stock hit a 52-week low of $120.55 last May and steadily rose to a high of $166.34 in December. At the start of 2024, IBM share prices remain near their 52-week high.
Is it too late to buy IBM stock now? Have investors already missed out on the gains? A closer look at the company and its stock suggests there are several reasons to still consider an investment in Big Blue, particularly if you hold shares over the long haul. Let me explain.
IBM's business growth strategy
IBM's long-term growth prospects look favorable because the company is focused on two large, expanding markets: artificial intelligence and cloud computing. The AI market alone has years of growth ahead with forecasts predicting the industry will reach nearly $2 trillion in annual revenue by 2030, a substantial increase from 2023's $208 billion.
IBM views these two industries not as separate markets, but as interconnected, particularly considering the massive data typically stored in the cloud that AI relies on to execute tasks. This led to Big Blue tackling these markets with a unified strategy centered around a hybrid approach.
Take cloud computing, for starters. IBM specializes in a hybrid cloud, which combines the lower cost of public cloud infrastructure shared across organizations with the security and privacy of a private cloud dedicated to a specific company. A hybrid cloud is ideal for Big Blue's clients in industries with regulatory requirements, such as finance, government, and healthcare. Some IT tasks (hosting a website, for instance) can use a public cloud. Confidential data, including financial and customer records, is better suited for a private cloud.
IBM sees the AI industry also moving toward a hybrid approach. CEO Arvind Krishna said on the company's third-quarter earnings call, "We believe that generative AI will be multimodal, with clients using a combination of IBM's models, other companies' models, their own proprietary models, and open-source models." The AI industry adopting a hybrid approach grants Big Blue's AI solutions an advantage, given its integration with the company's Red Hat hybrid cloud platform, which Krishna describes as "the foundation that allows clients to operate in a hybrid environment."
The success of IBM's strategy
IBM's synergy across AI and cloud computing has translated into sales growth. The company's AI and data division experienced a 6% year-over-year revenue jump in the third quarter, while its Red Hat cloud business saw a 9% increase. These businesses fall under IBM's software segment, which grew Q3 revenue by 8% year over year as the division delivered $6.3 billion of the company's $14.8 billion in sales.
In addition, with last year's surge in demand for AI, businesses rushed to adopt AI technology but needed help implementing these solutions. That's where IBM's army of 20,000 AI consultants proved an advantage, enabling the company's consulting arm to grow its Q3 revenue segment by 6% year over year to reach $5 billion.
IBM is also developing quantum computing technology. This is an entirely different approach to computing, harnessing quantum physics to execute computations too complex for today's most powerful supercomputers. Among Big Blue's quantum computing customers is Cleveland Clinic, the world's first business to receive a quantum computer dedicated to healthcare research. IBM's hybrid ecosystem strategy benefited Cleveland Clinic as it adopted Big Blue's AI and cloud computing offerings to assist in its quantum computing work.
To buy or not to buy IBM stock
IBM's quantum and other technologies aren't the only reasons to consider buying shares. Investors also benefit from the company's robust dividend, currently yielding 4%. Big Blue has increased dividend payouts annually for the past 28 years.
The company generated $1.7 billion in Q3 free cash flow (FCF), nearly $1 billion more than the prior year. FCF indicates IBM's ability to fund its dividend, so the company is well positioned to maintain its payouts.
Another factor to weigh is Big Blue's stock valuation. Contrast its price-to-earnings (P/E) ratio to competitors Amazon and Microsoft, the top two cloud computing companies. IBM's P/E ratio of 22 over the trailing 12 months is substantially lower than Microsoft's P/E multiple of 38 and Amazon's 81.
Moreover, IBM is one of the top 10 cloud computing companies in the world, showing it is successfully capturing market share despite larger rivals such as Microsoft. Even with the rise in stock price last year, IBM shares remain an appealing long-term investment given the company's successful revenue growth strategy, attractive valuation, and high-yield dividend.
