This isn't your great-grandfather's IBM (IBM +0.98%) anymore. It's still a great long-term investment, though.
IBM's pioneering history
The former maker of punch-card calculators evolved into an industrial computing powerhouse, a personal computing innovator, and then an all-you-can-eat buffet of information technology products. And just when everyone else started to copy Big Blue's successful business model, the company took a sharp turn into cloud computing, consulting services, data security, and artificial intelligence (AI).
It was a tough business transformation, but it's starting to pay off for longtime investors. About ten painful years after the newfound focus on AI and cloud services, ChatGPT came along to launch a marketwide fascination with AI.
Most investors didn't see IBM as a player in that explosive market at first, because it wasn't launching splashy consumer-facing AI apps or showing skyrocketing sales growth.
Image source: Getty Images.
How IBM captures corporate clients in the AI boom
IBM aims squarely for enterprise-class corporate customers. Other companies can chase consumers all they want, but this company always wants long-term contracts with deep-pocketed clients.
These deals take time, since the potential clients in this class often have to go through many layers of management approvals and technical testing. For that reason, it wasn't surprising to see other tech giants sprinting ahead of IBM in the AI boom's early days.
But the approvals have started to come in and IBM is recording robust sales in the AI market. The watsonx generative AI platform has only been around for one year but already has more than $2 billion of signed contracts.
The watsonx service includes the same large language model (LLM) technology as OpenAI's ChatGPT or Alphabet's (GOOG +1.99%) (GOOGL +1.71%) Gemini, but it's paired with a large array of machine learning tools. The resulting AI system combines IBM's decades of market-leading machine learning research with the user-friendly flexibility of LLMs, and the whole bundle connects to the client's proprietary business data.
While most AI experts wanted to bring something to market as soon as possible, IBM didn't launch watsonx until it had trackable data sources, ironclad security, and other business-friendly features. This is the solution for companies with valuable operating data and customer information.
I expect that order book to swell in the coming quarters and years. IBM is the AI leader you forgot about, poised to make a mint as the AI market matures.
NYSE: IBM
Key Data Points
Big Blue's future prospects
That's just one piece of IBM's technology puzzle. The company also provides enterprise-class data security tools. A wide range of consulting services sets Big Blue apart from other tech titans. It's even a front-runner in the emerging field of quantum computing with active quantum data centers in the U.S. and Germany.
The times, they are a-changing. IBM is always ready to roll with the punches and explore whatever the next big idea might be. Doubling down on AI years before the ChatGPT boom is one great example of this flexible attitude. IBM's quantum computing research is another.
The stock has gained a market-beating 56% over the last year, but it still trades at a modest 16 times free cash flow (FCF). By comparison, the average price/FCF ratio among S&P 500 (^GSPC +1.20%) stocks is a beefy 26x.
So you can buy into a proven innovator with leading roles in high-growth markets such as AI, cloud computing, and quantum computing -- all at a very low price. And whatever twists and turns might come in the road ahead, IBM will see them coming and probably already started planning for the next sea change.
In other words, you're not too late to invest in IBM at all. This stock should deliver solid returns in the long run, often leading the way into new eras and unheard-of technologies.
