Is IBM Stock a Smart Buy as We Approach 2025?

Are you on the lookout for a potentially undervalued opportunity in the artificial intelligence (AI) sector as we near 2025? Consider taking a closer look at IBM, a technology giant that is capturing attention for its AI capabilities.

Despite initial skepticism, the market is beginning to acknowledge International Business Machines (IBM) as a prominent player in the AI landscape. This recognition has led to a notable increase in IBM's stock price, which has risen by 37% in 2024, and an impressive 44% when accounting for reinvested dividends.

The question now is whether IBM's stock still presents a buying opportunity following this surge, or if its growth has hit a plateau. Let’s analyze IBM's current position and stock performance as we head into 2025.

Looking Beyond IBM's Surface-Level Numbers

At first glance, IBM's recent financial outcomes may seem lackluster. In their latest report for the third quarter, the company posted a modest 2% year-over-year increase in sales, primarily influenced by foreign exchange effects. The earnings per share (EPS) saw a 5% uptick, partly due to a lower tax rate. While these numbers align with analyst expectations, they hardly spark excitement.

However, a more thorough examination reveals that these seemingly flat results are actually signs of resilience. The infrastructure segment did experience a 7% revenue decline, heavily impacted by a 19% drop in the cyclical IBM Z mainframe division. This particular sector experiences fluctuations based on product cycles, with a scheduled refresh of IBM Z systems expected in 2025, which will incorporate more AI features using IBM’s proprietary AI chips.

In contrast, IBM's software and services sides performed admirably. Revenues from automation surged by 13%, the Red Hat hybrid cloud segment grew by 14%, and AI revenues experienced a 5% bump. Although the growth in AI revenue seems modest, it is encouraging to see other segments compensating for the anticipated downturn in mainframe sales.

The Long-Term Perspective of IBM's AI Contracts

It’s crucial to understand that IBM operates with a long-term vision. The company focuses on establishing multi-year subscription and technical support agreements, which means initial sales may take longer to materialize. Prospective clients often go through extensive rounds of testing, approval, and budget allocations prior to finalizing these complex AI systems.

In spring 2023, IBM launched its generative AI platform, watsonx. A year later, it secured over $2 billion in firm multi-year contracts. In just one quarter after that milestone, the order book grew by an additional $1 billion—a significant 50% increase in just three months. This growth points to a pivotal moment for the company, as it continues to convert these contracts into revenue while also attracting more clients.

The Future Looks Promising for IBM

IBM’s strategy has been evolving over the past decade, and the impact of the watsonx platform is becoming increasingly evident. The upcoming AI-enhanced System Z mainframes are poised to bring a positive turn in IBM's multi-year business cycle. The combination of this new product and robust AI contract activities is set to catalyze substantial sales growth and generate healthy cash flow.

"Our portfolio is well positioned to deliver an upward inflection in growth in 2025," stated IBM CEO Arvind Krishna during the third-quarter earnings call. This statement indicates that IBM’s results are expected to impress stakeholders in the coming year.

IBM's Attractive Valuation in a Flourishing AI Market

While the rise in stock price has influenced IBM's valuation, it still appears to be relatively affordable compared to other AI market leaders like Nvidia and Microsoft. Evaluating IBM’s price-to-sales and price-to-free cash flow ratios reveals that it remains a bargain in an otherwise booming market.

AI Stock	Price to Free Cash Flow (TTM)	Price to Sales (TTM)	Market Cap
IBM	16.5	3.3	$207 billion
Nvidia	58.3	29.1	$3.30 trillion
Microsoft	44.7	12.8	$3.2 trillion

In conclusion, the AI boom is exciting, and for those willing to adopt a patient investment approach, IBM presents a compelling opportunity. Buying shares of IBM at its current valuation seems wise, as compared to waiting for Nvidia or Microsoft to dip. With promising prospects for business growth, especially with upcoming watsonx contracts, 2025 may prove to be a transformative year for IBM.

IBM, AI, Stock