Should You Invest in This AI Stock Before 2025?

Are you on the lookout for an undervalued opportunity in the artificial intelligence (AI) sector as we approach 2025? If so, it's worth considering a major tech player before the chance slips away.

Recently, the market's perception of International Business Machines (IBM) has been shifting, and it is starting to gain recognition as a key player in the AI industry. This change in sentiment has led to a notable 37% increase in IBM's stock price during 2024, which jumps to an impressive 44% if you factor in dividends that were reinvested.

But the million-dollar question remains: Is IBM still a worthwhile investment after such a rapid surge, or is it losing momentum? Let's explore how the company and its stock are shaping up as we near 2025.

Evaluating IBM's Performance

At first glance, IBM's latest performance metrics may not seem particularly eye-catching.

In its third-quarter report, sales saw a modest 2% year-over-year growth, which was primarily driven by foreign exchange fluctuations. Meanwhile, earnings per share (EPS) increased by 5% due to a slight reduction in taxes. This kind of report might not stir up excitement but is in line with what analysts had anticipated.

However, a deeper dive into the numbers reveals some noteworthy aspects. The company's substantial infrastructure division experienced a 7% decline in revenue, which was heavily influenced by a 19% drop in its cyclical IBM Z mainframe business. This particular segment tends to fluctuate with mainframe product cycles, and a refresh of IBM Z systems is slated for 2025, promising to integrate more AI features powered by IBM's specialized AI chips.

Nonetheless, IBM's software and services divisions continued to perform well. Automation revenue saw a significant increase of 13%, while the Red Hat hybrid cloud business surged by 14%, and revenue from AI grew by 5%.

Although this AI growth figure might seem small, especially as AI is often marketed as a crucial growth area, it’s crucial to understand the context behind these numbers. The other segments have effectively compensated for the expected downturn in mainframe sales.

IBM's Strategic Approach to AI

A key factor to consider is that IBM's sales model is not focused on quick wins. Rather, the company prioritizes establishing long-term subscription and technical support contracts. Implementing complex solutions like generative AI systems often requires a detailed setup process, which can take a considerable amount of time. Clients typically go through several rounds of testing, management approvals, and budget discussions before finalizing contracts.

When these contracts are signed, however, they represent a steady revenue stream for IBM over the long term.

In the spring of 2023, IBM introduced its generative AI platform, watsonx. Fast forward to spring 2024, watsonx had secured over $2 billion in multi-year contracts. Just one quarter later, the order book had grown by another $1 billion, marking a substantial 50% increase in just three months—a clear indication of momentum building.

A Promising Future Ahead

This positive trend has been evident since the launch of watsonx. IBM is finally beginning to reap the benefits of a strategic shift that has been in the works for nearly a decade.

Next year, the AI-enhanced System Z mainframes will complement the thriving contract activity in AI, which should result in significant growth in sales and cash flows for the company.

"Our portfolio is well positioned to deliver an upward inflection in growth in 2025," said IBM CEO Arvind Krishna during the third-quarter earnings call. This indicates that impressive results should be anticipated when 2025 arrives.

IBM as an Attractive Investment in the AI Market

Although IBM's recent stock price increases have lifted its valuation ratios, that’s a typical outcome in the stock market. Nevertheless, when compared to other AI leaders, IBM shares still offer a value proposition—especially regarding cash profits. A closer look at key financial metrics highlights how IBM is more affordable compared to Nvidia and Microsoft:

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

According to data sourced on December 20, 2024, IBM presents a compelling case for investors eager to tap into the AI trend without paying a premium.

As an investor intrigued by the potential of the AI market, taking a gradual approach to investing could be wise. Acquiring shares of IBM at a relatively lower price makes sense, especially considering the rapid advancements expected in the company’s future through watsonx contracts.

Next year, the anticipated business growth is set to overshadow the more modest performance seen in 2024, particularly if improvements in AI contracts come to fruition.

AI, Investing, Stocks