shares of international business machine (IBM -1.32%) After a long and painful period of stagnation, stocks are finally trading at multi-year highs. Big Blue began a shift in its business strategy in 2012 under then-CEO Ginni Rometty, but many investors were worried about future developments such as cloud computing, data security and artificial intelligence (AI). was uncomfortable with sacrificing revenue growth to refocus on growth markets.
Well, we are in 2024. These precise target markets are the hottest areas in the digital space, and IBM stock has finally been given a ticket to jump on the broader stock market AI bandwagon. Thanks to a stellar Q4 report, orders from AI have surged and IBM stock is trading at prices not seen since his summer of 2014.
IBM's AI efforts are starting to bear fruit, and the company's AI-powered, cloud-based growth story is just beginning. Our success stories so far are just the tip of a much larger iceberg. It may have been a little slow to Wall Street's AI party, but I expect big growth from this tech heavyweight.
Focusing on B2B requires patience
At this point, IBM has spent more than a decade whittling itself away from its previous one-stop-shop approach to a collection of smarter, more efficient high-growth operations. Taking such a huge business in a new direction takes time and patience. It's like an oil tanker making a U-turn in San Francisco Bay, a slow operation that requires extreme caution.
This level of perseverance also applies to IBM's day-to-day operations. Big Blue is willing to let other companies fight each other to cater to fickle consumer tastes.
IBM is all about business-to-business services. Winning multi-year contracts in this market segment provides a long-term, reliable revenue stream. Additionally, corporate trading tends to be lucrative as it has high margins and can also provide side orders for technical support services.
Good things are never free, and IBM's focus on the enterprise has significant downsides. Getting the John Hancock you need for large, long-term software deals takes time. Prospective customers need to get hands-on with the new tool, testing its functionality, security, integration with existing systems, and more. In that case, her IT director at the company may need budget approval from multiple levels of management. Additionally, AI platforms can be controversial and slow down the process even more.
So it's no surprise that IBM's AI victories come a little later. The company is taking a detour toward this opportunity. On the positive side, there will be a big, fruitful, and lasting covenant at the end of the rainbow.
What makes IBM's AI solutions special?
Big Blue is not building another multipurpose ChatGPT platform. Its solutions are targeted at enterprise-class businesses with developer know-how to apply AI analytics and deep learning to their own business data.
IBM is also going the extra mile to explain how its AI systems reach their conclusions. It's the only way to provide business-grade insights. Thanks to Watson’s transparency, clients can audit the analysis and ensure that the AI’s conclusions are based on the right data. Customers can trust audited analytics more than AI solutions that come from black boxes with mysterious inner workings.
slow and steady wins the race
Even now, with AI orders piling up and market interest in IBM's Watson and Watsonx solutions, IBM is unlikely to be a get-rich-quick stock. Converting a company's service agreements (including a modern Software-as-a-Service approach to software licensing) doesn't immediately result in a large lump sum to the income statement. Instead, a recurring revenue stream is collected from customers on a monthly, quarterly, or annual basis. As such, a slew of AI orders coming from IBM's pipeline will look like a gradual swell with modestly increasing revenue and profits.
But you know what they say about successful investing: It's a marathon, not a sprint. IBM is taking its time to solidify its foundation for a very lucrative AI business, and I don't care about that at all. This is a much smarter strategy than rushing the process and losing out to the heavy flow of long-term AI deals.
IBM's AI success has been decades in the making, but we are only now beginning to see its economic impact. The stock still trades at just 2.7 times sales and 13.6 times free cash flow, making it a risky value play next to AI darlings like: Nvidia or microsoft. IBM's stock price could double or triple, but it would still look cheap by comparison.
Finally, you know that IBM is built to last. The company has been around since the 1800s and has deftly switched target markets to remain relevant and profitable amidst numerous sea changes and disasters. AI shift is also an example of shareholder-friendly management methods. And don't forget, he's now locking in a hefty 3.6% dividend yield, backed by mountainous cash profits and 28 consecutive years of annual dividend growth.
No matter how you look at it, IBM appears poised to make money for us investors forever.
Alphabet executive Suzanne Frye is a member of The Motley Fool's board of directors. Anders Bylund has positions at Alphabet, International Business Machines, and his Nvidia. The Motley Fool has positions in and recommends Alphabet, Microsoft, and Nvidia. The Motley Fool recommends International Business Machines and recommends the following options: His January 2026 $395 long call on Microsoft and his January 2026 $405 short call on Microsoft. The Motley Fool has a disclosure policy.
