Thanks to excitement about opportunities in AI and improving business results, IBM (NYSE: IBM) stock has rallied roughly 22% over the last year. The company’s share price now trades in the neighborhood of a five-year high, but its performance across the stretch has still lagged far behind the S&P 500 index’s gains over the last half-decade.
Is Big Blue an overlooked AI stock that’s still trading at deep-value prices? If you’re thinking about investing in IBM or already own its shares, read on to see why two Motley Fool contributors have vastly different takes on what comes next for the company.
Bull: IBM’s bargain-bin valuation — a hidden gem in plain sight
Anders Bylund: Big Blue is one of my most exciting stock holdings right now, for a couple of reasons:
IBM is an AI pioneer with decades of experience and an unmatched patent portfolio in the field.
One might think the AI expertise would have lifted this stock sky-high in 2023, but that didn’t happen. IBM’s stock only rose by 23.2% last year, lagging behind the S&P 500 (SNPINDEX: ^GSPC) market index and its 26.7% yearly return.
As a result, IBM’s stock trades at bargain-bin valuation ratios. Shares are changing hands at just 2.6 times sales and 13.1 times free cash flow.
In other words, Wall Street didn’t get the memo about IBM’s deep AI expertise. I get that investors may be skeptical about the company’s growth prospects after the painful strategy shift that started over a decade ago and drove the revenue line sharply downward. But that was also where IBM refocused on long-term growth opportunities such as cloud computing and artificial intelligence.
Furthermore, IBM’s focus on corporate clients may have left investors frustrated with a lack of ChatGPT-like toys and trinkets from the Armonk headquarters. I see that intense focus as a sophisticated business advantage.
IBM is aiming its AI strategy at a lucrative subsector at the corner of Wall Street and Silicon Valley, where contracts are large and customers aren’t terribly price-sensitive.
On the downside, IBM’s prospective customers often take their sweet time putting new software solutions through the paces of testing. Everything needs a checkup, from security and performance to systems integration and management approvals. After that sluggish process, IBM ends up with a valuable customer for the long term, kept loyal with a combination of multiyear contracts, world-class technical support — and a suite of AI products that isn’t easily replaced.
These are the slow days of IBM’s exposure to the AI frenzy inspired by ChatGPT. I can’t wait to see the durable benefits materialize in 2024 and 2025. This is where IBM’s slow-burn strategy shift should start to pay off, setting the company up for another few decades of market-leading relevance in the era of high-powered AI systems.
And that, my friends, is how you make a little company focused on punch-card information management stick around for a century or two. A flexible attitude to ever-changing IT markets is IBM’s secret recipe for essentially everlasting prosperity.
And right now, you can invest in this rock-solid innovator at a bargain-bin price. Oh, and the stock comes with a generous 3.9% dividend yield, backed by mountains of cash profits and a strong commitment to annual payout growth in any economy.
Where do I sign up?
Bear: Big Blue has too often been “Big Bluff”
Keith Noonan: IBM has suffered from terrible mismanagement over the last couple of decades. Some of that can be attributed to conflicts between more growth-oriented segments and certain legacy businesses that have since been spun off under the Kyndryl banner. But in general, it’s been a slow-moving company that has repeatedly failed to execute and innovate.
Speaking as a former shareholder, Big Blue is prone to frustrating cycles. The company has a history of promising a lot and underdelivering when it comes to new tech trends. To me, the company became “Big Bluff.”
Whether it was cloud computing, AI applications, or quantum computing, IBM has frequently touted game-changing strengths that almost never move the needle when it comes time to report earnings.
It’s worth noting that the Watson platform has been on the scene for well over a decade. While current software under that banner is radically different, IBM’s early-mover status in AI has never translated into strong sales and earnings performance.
I also don’t see much evidence that Big Blue has built an overlooked competitive advantage just waiting to be unfurled. For all of the company’s talk about customer interest in its generative AI solutions, sales only increased by 2% annually in 2023.
What growth the company has been able to deliver through the years has been largely driven by acquisitions. It’s loaded its balance sheet up with debt to fund buyouts and suffered as talented employees left for greener pastures.
While there are undoubtedly many very smart people working at IBM today, I think the company will continue struggling to attract top tech talent compared to Microsoft, Amazon, Alphabet, and other rivals with deeper resources and far better innovation track records.
The verdict is still out on how current CEO Arvind Krishna’s tenure will be remembered, but I don’t see much that inspires confidence so far.
Is IBM stock a smart buy right now?
IBM stock trades at seemingly nonprohibitive earnings multiples and pays a sizable dividend. The company could also have underappreciated opportunities in artificial intelligence. On the other hand, Big Blue’s AI outlook is still speculative, and the business is growing at a relatively slow pace.
For investors seeking AI stocks that trade at low earnings multiples and pay big dividends, IBM stock could be a great portfolio fit. For those seeking robust sales growth in the near term and clear-cut advantages in artificial intelligence, other big-tech stocks may be better buys.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Anders Bylund has positions in Alphabet, Amazon, and International Business Machines. Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool recommends International Business Machines. The Motley Fool has a disclosure policy.
IBM Stock: Bull vs. Bear was originally published by The Motley Fool