Should You Invest in IBM Stock Before 2025?

Are you searching for an undervalued opportunity in the artificial intelligence (AI) market as we approach 2025? It might be time to consider International Business Machines (IBM) before the chance slips away.

Despite skepticism in the market, IBM is beginning to emerge as a key player in the AI landscape. This shift is reflected in IBM's stock performance, which has surged by an impressive 37% in 2024. If dividends are factored in, the total return jumps to 44%.

The question remains: Is IBM still a worthwhile investment after such a rapid increase, or has its growth potential run dry? Let's explore the company and its stock positioning as we near 2025.

Don't Judge IBM by Initial Appearances

At first glance, IBM's recent performance might seem underwhelming. In the latest third-quarter report, sales only rose by 2% compared to the previous year, primarily due to foreign exchange fluctuations. Earnings per share (EPS) increased by 5%, which can be attributed in part to a lower tax rate. Overall, this is a safe, stable report that aligns fairly well with analyst predictions, but lacks excitement.

However, a closer examination reveals that these seemingly flat results hold some positive aspects. The robust infrastructure segment experienced a decline of 7% in revenue, partly driven by a 19% drop in the cyclical IBM Z mainframe division. The performance of this segment can vary significantly with mainframe product cycles, but a refresh of IBM Z systems is on the horizon for 2025. This upcoming release is expected to incorporate more AI features powered by IBM's proprietary AI chips.

On the brighter side, IBM's software and services segments showed resilience. Automation revenues climbed by 13%, the Red Hat hybrid cloud business grew by 14%, and AI-related revenues ticked up by 5%.

The Long-Term Strategy Behind AI Contracts

It's vital to understand that IBM operates differently regarding contract sales. Instead of focusing on quick sales, IBM emphasizes long-term subscriptions and technical support contracts. Setting up these complex systems, particularly generative AI technologies, requires time and multiple approval processes from potential clients before finalizing deals.

When these contracts are secured, they often promise substantial long-term value. In early 2023, IBM introduced its generative AI platform called watsonx. By the following year, watsonx had already secured over $2 billion in multi-year contracts.

Remarkably, one quarter later, the order book grew by another $1 billion—representing a notable 50% increase within just three months. This increase indicates that IBM is approaching a turning point, with cash sales expected to eventually materialize from these paper contracts as more deals are signed.

Poised for Growth After Years of Preparation

This gradual approach to business has been evident since the launch of watsonx. IBM is finally leveraging a strategic shift that has been in the works for almost a decade. With the AI-focused System Z mainframes expected to launch next year, this will mark the positive side of a multi-year business cycle. The synergy between the mainframe upgrades and growing AI contract activities should lead to significant sales increases and strong cash flow.

As IBM's CEO, Arvind Krishna, mentioned in the recent earnings call, "Our portfolio is well positioned to deliver an upward inflection in growth in 2025." This statement reflects optimism for impressive results next year.

IBM Offers Value in a Booming AI Market

While IBM's stock prices have risen, driving up its valuation ratios, it remains a relatively affordable option compared to other technology giants in the AI industry, particularly in terms of cash profits. When looking at price-to-sales and price-to-free-cash-flow metrics, IBM is significantly cheaper than competitors like 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	$3.3 trillion
Microsoft	44.7	12.8	$3.2 trillion

Data sourced on December 20, 2024. TTM = trailing twelve months.

The AI boom excites many investors, and taking a measured approach can be a wise move. Therefore, it is advisable to consider purchasing IBM shares while they are still considered affordable. Other tech giants like Nvidia and Microsoft can be evaluated later.

Overall, the anticipated business growth in 2025 is likely to outperform 2024's modest gains, especially with IBM's watsonx contracts paving the way for a future-oriented outlook.

AI, Stocks, Investment