Sunday, 8 September 2024
by BD Banks
The International Business Machines (NYSE: IBM) you see today is very different from the Big Blue of yesteryear. The company moved from an all-you-can-eat technology buffet to a software-and-services expert with a heavy dose of artificial intelligence (AI) — just in time for the ongoing AI boom.
And IBM will keep changing from here. Let’s check out the plans this technology veteran has for the next five years.
You already know all about IBM’s long history in AI research. For example, the company still highlights the Big Blue chess computer’s 1997 victory over human world champion Garry Kasparov on its investor relations site. That was an early example of AI beating humans in a complex task, using a supercomputer with number-crunching powers comparable to a 2011-era smartphone.
And IBM remains an AI leader today, though its business-focused research might not inspire a lot of headlines. The Watson AI engine delivers data analytics and generative AI services with some unusual qualities. Above all else, the company makes sure that Watson’s output can be traced back to the original sources, helping clients avoid pitfalls such as AI hallucinations, copyright infringement, and low-quality data sources.
The company also designs its own AI accelerator chips, complementing its use of Nvidia (NASDAQ: NVDA) processors. AI accelerators are already moving into IBM’s classic range of Z-system mainframe servers. Going beyond today’s traditional chip architectures, Big Blue even chases next-generation leadership as an innovator in the quantum computing space.
Quantum computers will probably not be ready for prime time five years from now. That’s a longer-term ambition, but an important one that should always be on your mind when analyzing IBM’s long-term future. Come back in 10 or 15 years, and you’ll probably see quantum processors in that era’s mainframe systems.
So I’m looking at an experienced technology leader with robust AI business prospects in the near term and quantum plans further down the road. Management is covering all the bases in terms of growth-boosting technologies.
“Leadership is not a birthright,” Arvind Krishna said in October 2020, six months after taking office as IBM’s CEO. “It takes perpetual reinvention. It requires working tirelessly to innovate. It demands a willingness to question tired traditions. And it implies making big, bold decisions to be on the right path.”
You’re seeing the results of that re-innovation effort these days. As a result, IBM should deliver fantastic financial results in the long run.
IBM’s revamped business focus was years in the making, and the transition was painful for long-term investors like yours truly. The stock gained just 28% over the last 13 years, lagging far behind the S&P 500 (SNPINDEX: ^GSPC) index’s 371% gain. The company did better in terms of total returns, which include the value of reinvested dividends, but it still couldn’t keep up with the broader market across this very long transition:
IBM total return level; data by YCharts.
It’s hard to say whether the next era of AI-powered growth will make up for the market pain of years past, but this certainly looks like a good entry point for new IBM investors.
Sales are up by 4.5% in two years, in spite of significant currency exchange headwinds. Free cash flow rose by 61% over the same time span. A leaner, meaner IBM should continue to grow its cash profits over the next five years. And the stock is priced at just 14.7 times free cash flows and 3 times sales today, making it a low-cost play on the soaring AI market.
I’ll gladly hold on to the shares I bought in 2015 as the generative AI era plays out. New investors get a generous 3.3% dividend yield with their freshly acquired shares, but my effective yield works out to 6.5% after nine years of reinvested dividends. Patience is always a virtue on Wall Street, but there’s no time like the present to get started on your own long-term IBM holding.
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Anders Bylund has positions in International Business Machines and Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends International Business Machines. The Motley Fool has a disclosure policy.