Let me cut right to the chase.
In my book, International Business Machines (IBM -1.05%) is one of the best buys on the market today. I've been rolling out the red carpet for Big Blue since the artificial intelligence (AI) frenzy started about a year ago. Now, I'm back to give this underappreciated AI giant the green light once again.
IBM, the forgotten AI pioneer
AI has been the hottest water cooler talk since OpenAI introduced the ChatGPT platform to the public in November 2022. Nearly all the companies with fingers in that pie -- or anywhere near it -- enjoyed skyrocketing stock prices and valuations in 2023. Somehow, IBM never got that memo. The stock rose by less than the S&P 500 index last year, even if you account for IBM's generous dividend payouts. In fact, for part of the year, IBM's shares even experienced negative dividend-adjusted returns amid the AI boom.
IBM Total Return Level data by YCharts.
That's completely unfair, given the company's decades of AI expertise and its long-standing focus on this exact opportunity.
But I also get why the stock hasn't soared on AI-powered wings yet. IBM's progress isn't immediately obvious, after all.
Still, I'm convinced that IBM's days of AI-flavored business success and soaring share prices are coming up -- maybe even quite soon.
Why IBM stock isn't riding the AI wave yet
Simply put, IBM's strict focus on business-to-business services is slowing things down. It takes time to convert surging enterprise customer interest into revenues and profits.
The details may vary on a case-by-case basis, but the basic story is always the same. Hot new technologies such as the Watsonx AI platform must go through several rounds of reviews and testing, focused on performance, security, integration with other systems, and more. Then, the purchase order may need sign-off from several layers of management, especially if it's a high-dollar contract with a multiyear commitment.
So today, IBM is quietly building tomorrow's AI-propelled results under the covers of confidential testing and consulting agreements. Early signs of this activity are already popping up.
For example, IBM's order bookings in generative AI and Watsonx services doubled between the third and fourth quarters of 2023. At the same time, the number of tech demos and pilot programs related to AI continued to increase during the fourth quarter. In other words, the proven interest is high and rising -- but it hasn't had time to convert these brewing commitments into revenues quite yet.
Time for a timely IBM investment
I think people have started catching on to IBM's AI-driven business prospects.
The fourth-quarter report it delivered on Jan. 24 was largely in line with Wall Street's consensus expectations, but the stock still soared by as much as 12.7% over the two days that followed the release. You see, the forward-looking parts of that report shone a bright spotlight on IBM's AI opportunity.
And it's more than a portfolio full of sophisticated AI tools and services aimed squarely at the needs of enterprise-class customers. A couple of rivals can keep up with IBM that far. But they can't match Big Blue's global consulting services, which come in handy for helping AI clients squeeze maximum value out of their Watsonx contracts. That's a win-win situation for IBM and its customers, unlocking a third win for shareholders.
"We are the only provider today that offers both the technology stack with our Watsonx platform and consulting services for deploying and managing generative AI," CEO Arvind Krishna said on last week's earnings call. "The early work for clients around data architecture, security, and governance is critical and hard, and we think consulting expertise is going to be crucial here."
The company is pulling every available lever to accelerate the undeniable AI boost. So if you want to grab some IBM shares while the stock still trades at just 14 times free cash flow and 2.8 times sales, this is the time to make a move. Big Blue probably won't be found in Wall Street's bargain bin much longer.
