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The artificial intelligence (AI) megatrend has created trillions of dollars of wealth on Wall Street, as investors have made a beeline for stocks such as Nvidia (NVDA), AMD (AMD), ChatGPT lead investor Microsoft (MSFT), and Amazon (AMZN), among others. And why wouldn't they? The AI market, valued at approximately $515.3 billion in 2023, is projected to grow significantly, reaching $2.74 trillion by 2032. This forecast highlights the immense growth potential still untapped within the sector.
AI's applications span a wide range of industries, including automobiles, healthcare, and more, positioning it as a transformative force driving innovation and economic expansion across diverse fields. However, while the likes of Nvidia, AMD, and less established companies like Super Micro Computer (SMCI) have hogged the limelight amid the AI juggernaut, International Business Machines (IBM) has been somewhat overlooked by investors as a viable AI bet. This might seem surprising, considering IBM developed the Watson computer system, the AI computer that made history by defeating the popular TV quiz show Jeopardy's best-ever human players.
Looking under the surface, at least one well-placed tech insider seems to think that IBM stock is a good investment at current levels.
About IBM Stock
For the Gen Z-ers who are not well-versed in IBM's credentials, the company has been a leading IT giant for over a century. Currently, IBM is a leading provider of global hybrid cloud and AI solutions, along with consulting expertise. It also offers a wide range of software products, and delivers traditional IT infrastructure solutions, like storage and servers.
Valued at a market cap of $194.4 billion, IBM stock is up 31.2% on a YTD basis, and also offers a dividend yield of 3.18%. What's more, IBM is on the verge of being a “Dividend Aristocrat,” as it has raised dividends consistently over the past 24 years.
IBM stock is also trading at reasonable valuations when compared to the rest of the tech sector. The stock is valued at a forward price/earnings (P/E) ratio of 20.59, a discount to the sector median of 24.36x. Likewise, the price/cash flow (P/CF) ratio for IBM is 15.11, about 30% cheaper than the median tech stock.
IBM Insider Buys Stock Worth $200K
Alfred W. Zollar is a familiar name within IBM circles. A company veteran who served the company for 34 years, Zollar was the general manager of IBM iSeries, where he oversaw the executive leadership, strategy, and profit and loss (P&L) of the iSeries (formerly AS/400) server product line. Earlier, he held senior management positions across IBM’s diverse software divisions, including serving as the general manager of IBM Lotus Software, where he played a key role in advancing enterprise collaboration solutions.
Currently a board member of IBM, Zollar most recently occupied the position of Executive Advisor with private equity firm Siris Capital Group, and is also on the board of directors at Nasdaq (NDAQ).
Notably, Zollar recently purchased IBM shares worth about $200,000. On Nov. 13, the board member bought 936 shares of the company at an average price of $210.6185 per share for $197,139, marking the first insider buy on IBM in over two years. For what it's worth, Zollar also purchased over $203,000 worth of NDAQ shares on Nov. 13.
IBM's Consistent Results
IBM has been a steady performer in terms of financial results in recent quarters. For instance, the company's EPS has surpassed consensus estimates in each of the past 12 quarters.
In the most recent quarter, this trend continued. In Q3, IBM's revenues of $15 billion rose 1% from the previous year, while EPS of $2.30 reflected growth of 4.6% in the same period. Over the past three years, IBM has compounded its revenues and earnings at rates of 13.69% and 48.5%, respectively.
The cash flow-generating capabilities of the company remained healthy, as well, with net cash from operating activities at $2.9 billion and free cash flow of about $2.1 billion in the quarter. Encouragingly, IBM's short-term debt levels almost halved from the start of the year, dropping to $3.2 billion from $6.4 billion. Overall, IBM closed the quarter with a cash balance of $13.2 billion.
Strategic AI Initiatives
Supported by its strong balance sheet, IBM is making significant strides in the AI space with a clear focus on enterprise solutions. To overcome challenges related to data privacy that hinder widespread AI adoption, the company’s WatsonX AI platform and the Granite family of models offer promising solutions. IBM Consulting further enhances its AI initiatives by integrating services with a library of role-based AI assistants, allowing for enterprise-level customization.
Moreover, in October, the company announced the latest version of its AI models called Granite 3.0. for businesses, with 8B and 2B models. Consequently, with the progress in their in-house AI models, IBM could potentially accelerate the growth in their IT consulting business, helping enterprises customers cloud transition, digitalization and AI employment.
IBM's momentum in AI is evident, with AI bookings growing from $2 billion in the second quarter to $3 billion in the third quarter. Additionally, IBM's partnership with Facebook parent Meta (META), established a year ago, is beginning to yield results. Leveraging its expertise in delivering customizable AI solutions, IBM plays a key role in the launch of Meta's Llama 3.1 model, particularly the 405 billion parameter variant. In this collaboration, IBM is responsible for tailoring, modifying, and implementing the models developed by Meta.
IBM has also established partnerships with Amazon, Adobe (ADBE), and Microsoft. These developments position IBM as a leader in AI, combining its strengths in consulting, software solutions, and AI development. This makes the company an ideal partner for enterprises navigating AI adoption while ensuring compliance with stringent data regulations.
Quantum Computing Prowess
As the first commercial company to develop quantum technology on a large scale, IBM has made significant strides in the field of quantum computing. Its quantum computing platform, Qiskit, is tailored for companies looking to code and implement quantum computing software.
Additionally, IBM boasts the largest operational quantum computer, known as Condor.
Analysts Are Skeptical
While Zollar thinks the legacy tech stock is a buy at current levels, analysts have deemed IBM stock a “Hold,” with a mean target price of $221.41. This indicates an expected upside potential of roughly 3% from current levels.
Out of 17 analysts covering the stock, 4 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, 10 have a “Hold,” and 2 have a “Strong Sell” rating.
