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Should You Buy This Artificial Intelligence (AI) Stock Before 2025?

From Yahoo! Finance

Should You Buy This Artificial Intelligence (AI) Stock Before 2025?

A skeptical market is finally starting to see International Business Machines (NYSE: IBM) as a leading name in the artificial intelligence (AI) market. As a result, IBM's stock has gained a market-beating 37% in 2024 -- or 44% if you look at total returns with reinvested dividends.

Is Big Blue still a buy after this swift rise, or is the growth engine running out of rocket fuel? Let's see how the company and stock are positioned just before 2025.

At first glance, IBM's recent results may not look too impressive.

Sales rose just 2% year over year in the recent third-quarter report. Foreign exchange effects explained the entire revenue increase. Bottom-line earnings per share (EPS) came in 5% higher, partly thanks to a slightly lower tax rate. Am I boring you to sleep yet? That's a safe and stable report, broadly aligned with analyst expectations and hardly anything to get excited about.

But when you dig deeper, you'll see that IBM's flattish results actually are impressive. The beefy infrastructure segment showed a 7% revenue dip, led by a 19% downturn in the very cyclical IBM Z mainframe business. This division rises and falls with mainframe product cycles, and the next refresh of IBM Z systems is due in 2025. That release should see more AI features powered by IBM's custom AI chips.

Balancing out that cyclical headwind, IBM's software and services pulled their weight. Automation revenues rose 13%, the Red Hat hybrid cloud business came in 14% higher, and AI revenues ticked 5% higher.

That's another disappointing figure, right? AI is supposed to be a leading growth driver, not a modest single-digit revenue booster. So, it's nice to see other businesses make up for the predictable mainframe slowdown. But why is the AI growth so limited?

The thing is, IBM doesn't make quick sales. Instead, it sets up long-term subscription and technical support contracts. The setup phase can be quite slow, especially regarding complicated ideas like setting up generative AI systems. Many prospective clients go through several rounds of technical testing, management approval, and budget processes before signing on the dotted line.

But when they do, IBM will have a lucrative customer for the long haul.

In the spring of 2023, the company launched a generative AI platform called watsonx. One year later, watsonx had amassed more than $2 billion of firm multiyear contracts.

One quarter later, the watsonx order book had grown by another $1 billion. That's a 50% order increase in three months, also known as a tipping point. Big Blue will convert these paper contracts into cash sales over time while also signing more AI deals.

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