Wednesday, 24 April 2024

2 Leading Tech Stocks to Buy in 2024 and Beyond

by BD Banks

2024 is off to a shaky start. The S&P 500 (SNPINDEX: ^GSPC) market index rose more than 10% in the first quarter, only to lose half of that gain in April.

Some market darlings are still soaring to unbelievable heights, usually thanks to their expertise in artificial intelligence (AI). And the closer you get to the inner circle of technology support for OpenAI and its game-changing ChatGPT tool, the loftier the valuation ratios get. Chip designer Nvidia (NASDAQ: NVDA), software titan Microsoft (NASDAQ: MSFT), and high-end computer systems builder Super Micro Computer (NASDAQ: SMCI) are all riding the ChatGPT monster’s coattails to valuation ratios of historic proportions.

But there are still bargains to be found in today’s hyperactive market — even in the AI industry.

Meet IBM (NYSE: IBM) and Dell Technologies (NYSE: DELL). These tech veterans are also tapping into the AI surge in a big way, but their stocks are not soaring like the Nvidias and Supermicros of the world. In fact, IBM’s stock has underperformed the S&P 500 since OpenAI unveiled ChatGPT:

2 Leading Tech Stocks to Buy in 2024 and Beyond

SMCI data by YCharts

Despite their milder stock performance, Dell and IBM measure up to the best and brightest AI stocks where it matters most. So let’s take a look at their financial muscle and long-term prospects in the AI market. In the end, you should walk away with a new appreciation for IBM and Dell as lower-priced plays on the exciting AI opportunity.

Ringing Dell’s AI bells

You may not think of Dell as an AI powerhouse. The company may have made one of your favorite laptops, or the desktop workstation you had in the office 15 years ago. Or perhaps your Dell memories are a bit fresher, as the company remains the third-largest maker of PC systems in the world, alongside a robust presence in server-class computers.

But AI is a big business driver for Dell right now. AI servers accounted for $1.5 billion of Dell’s revenues in fiscal year 2024, which ended on February 2. But the incoming order volume for these specialized servers grew 40% year over year in the fourth quarter. Dell has a $2.9 billion backlog of unfilled AI orders, and that backlog nearly doubled over the same period.

That’s still a relatively small portion of Dell’s total sales, which added up to $88.4 billion last year. But AI systems are growing faster than any other part of the Dell empire, and the rising popularity of high-end AI servers is also widening its profit margins.

At a recent industry conference, Arthur Lewis of Dell’s infrastructure solutions group said that the consumer-facing AI boom is in the “early innings” of a proverbial baseball game. But the enterprise surge hasn’t even started yet.

“When it comes to the enterprise, we’re in the car pulling up into the stadium, and the teams are still trying to figure out the rules of the game,” Lewis said. “At the end of the day, this technology, we believe, is a once-in-a-lifetime opportunity. One of the most significant advancements probably in human history.”

With that kind of growth opportunity in its long-term sights, it’s kind of ridiculous to price Dell’s stock at 0.9 times sales and 11 times free cash flows. Those are bargain-basement ratios and not a reasonable valuation for an AI-powered growth story that has barely gotten out of the starting blocks yet.

Can you beat Big Blue in enterprise services?

The same long-term opportunity in enterprise AI sales applies to IBM’s investment case, too. But IBM is happy to let companies like Dell provide hardware platforms for its more lucrative software solutions — and then sell consulting and tech support services to complete the AI package.

Like Dell, IBM boasts high-octane AI growth backed by a growing pipeline of unfilled long-term contracts. In January’s fourth-quarter earnings call, CEO Arvind Krishna noted that the order book for generative AI and the watsonx AI platform doubled from the third quarter. One-third of these future revenues come from software licenses and cloud-based subscriptions, while the remaining two-thirds are related to consulting services.

There are many companies in the AI game these days, but I can’t think of anyone else matching IBM’s software-plus-services business mix. It’s like catnip for large-scale corporate clients, who crave tailor-made software solutions with hands-on tech support.

“We are the only provider today that offers both the technology stack with our watsonx platform and consulting services for deploying and managing generative AI,” Krishna said. “The early work for clients around data architecture, security, and governance is critical and hard, and we think consulting expertise is going to be crucial here.”

And in this early slog, IBM is building long-term business relationships that clients will find difficult to replace with competing solutions later on. You’re watching the slow start of a massive market opportunity here, much like Lewis’ baseball stadium metaphor where enterprise customers are looking for long-term parking spots.

So if you’re looking for hardware and software plays on the AI market in 2024, Dell and IBM fit those respective bills to a T. And their stocks aren’t even expensive, unlike Nvidia and Microsoft.

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Anders Bylund has positions in International Business Machines and Nvidia. The Motley Fool has positions in and recommends 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.