Shares of International Business Machines (NYSE: IBM) are finally trading at multiyear highs after a long and painful period in the doldrums. Big Blue started shifting its business strategy in 2012 under then-CEO Ginni Rometty, but many investors were uncomfortable with sacrificing revenue growth in order to refocus on future growth markets such as cloud computing, data security, and artificial intelligence (AI).
So here we are in 2024, those exact target markets are the hottest areas of the digital arena, and IBM’s stock has finally been given a ticket to climb aboard the broader stock market’s AI bandwagon. Thanks to a stellar fourth-quarter report, with more than a dash of AI orders, IBM stock is trading at prices not seen since the summer of 2014.
IBM’s commitment to AI is starting to pay off, and the company’s AI-powered, cloud-based growth story has only just begun. The success story so far is the tip of a much larger iceberg. It may have been a bit late to Wall Street’s AI party, but I expect a massive growth spurt from this tech sector stalwart.
A B2B focus demands patience
At this point, IBM has spent more than a decade whittling itself down from its former one-stop-shop approach into a sleeker, more efficient bundle of high-growth operations. Pointing such a huge business in a new direction takes time and patience. It’s like an oil tanker making a U-turn in San Francisco Bay — a slow operation requiring great care.
This level of patience also applies to IBM’s day-to-day operations. Big Blue is happy to let other companies fight among themselves to cater to fickle consumer tastes.
IBM is all about business-to-business services. Once you win a multiyear contract in this market segment, you’ll have a reliable revenue stream for a long time. Moreover, corporate deals tend to be lucrative, with generous profit margins and side orders of technical support services.
Nothing good is ever free, and there’s a significant downside to IBM’s tight enterprise focus. It takes a while to get the necessary John Hancocks on a large, long-lasting software contract. A prospective client must put the new tool through the paces by testing its functionality, security, integration with existing systems, and more. Then, the company’s IT director may need budget sign-offs from several layers of management. Moreover, AI platforms can be controversial, slowing down the process even further.
So it’s not surprising to see IBM’s AI wins are coming in a bit late. The company is taking the long way around to this opportunity. On the upside, there will be large, fruitful, and durable contracts at the end of the rainbow.
What makes IBM’s AI solutions special?
Big Blue isn’t building another multipurpose ChatGPT platform. Its solutions are aimed at enterprise-class corporations that have the developer know-how to apply AI analytics and deep learning to their proprietary business data.
IBM also goes the extra mile to explain how its AI systems reach their conclusions. That’s the only way to deliver business-grade insights. Thanks to Watson’s transparency, a client can audit the analysis and make sure the AI conclusions are based on good data. Clients can trust those audited analyses more than they would an AI solution that came from a black box the inner workings of which are inscrutable.
Slow and steady wins the race
Even now, with AI orders piling up and driving deeper market interest in IBM’s Watson and Watsonx solutions, IBM won’t become a get-rich-quick stock. Converting firm service contracts (including the modern software-as-a-service approach to software licenses) doesn’t result in big lump sums on the income statement right away. Instead, recurring revenue streams are collected from customers on a monthly, quarterly, or annual basis. So the impressive volume of AI orders coming down IBM’s pipeline will look more like a slow groundswell of modest growth in revenues and profits.
But you know what they say about successful investing: It’s a marathon, not a sprint. IBM is taking its sweet time cementing the foundation of an incredibly lucrative AI business, and I don’t mind that at all. It’s a much smarter strategy than rushing the process and losing out on a robust tide of long-lasting AI deals.
IBM’s AI success was decades in the making, but these are the early days of its financial impact. The stock still trades at just 2.7 times sales and 13.6 times free cash flow, making it a red-tag value play next to AI darlings such as Nvidia or Microsoft. IBM stock could double or triple in price and still look like a bargain by comparison.
Finally, you know IBM was built to last. The company has been around since the 1800s, deftly switching target markets to stay relevant and profitable through a plethora of sea changes and calamities. The AI shift is another example of this shareholder-friendly management approach. And don’t forget that you can lock in a generous 3.6% dividend yield right now, backed by mountains of cash profits and 28 straight years of annual payout boosts.
For all intents and purposes, IBM looks ready to make money for us ordinary investors forever.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Anders Bylund has positions in Alphabet, International Business Machines, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Microsoft, and Nvidia. The Motley Fool recommends International Business Machines and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
IBM’s AI Revolution: How Small Investors Can Make Money Forever With Big Blue’s Phenomenal Expertise was originally published by The Motley Fool
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