Shares of International Business Machines (IBM -0.59%) rose by 12.3% in January 2024, according to data from S&P Global Market Intelligence. The centennial computing giant soared on the wings of a stellar earnings report, indicating that Big Blue’s fundamental bet on cloud computing and artificial intelligence (AI) is starting to pay off.
IBM’s AI-driven business boost
The raw numbers in IBM’s earnings report weren’t exactly spine-tingling. Revenue increased 4.1% year over year to $17.4 billion, edging out the consensus analyst estimate by $80 million. On the bottom line, adjusted earnings rose 7.5% to $3.87 per diluted share, exceeding your average analyst’s target by 2%. Robust results, but hardly a game-changing report so far.
The truly market-moving news showed up elsewhere in the report. Based on recent and current business trends, IBM’s management expects revenue growth in mid-single-digit percentages next year, which is about double the growth expected by Wall Street pros. Free cash flows should land near $12 billion in 2024, up from last year’s total of $11.2 billion — beating the company’s guidance from three months earlier by $1.5 billion.
But wait, there’s more. Arguably the most important and inspiring part of IBM’s earnings report was the review of unfilled orders for artificial intelligence (AI) services piling up.
By the end of the third quarter, IBM’s order bookings for generative AI and Watsonx AI services stood in “the low hundreds of millions,” according to CEO Arvind Krishna’s earnings call comments. At the end of December, that metric had doubled. Most of the new business consists of consulting services, helping customers install, integrate, and make the most of Big Blue’s game-changing AI tools.
In other words, IBM unveiled an incredibly strong demand for its AI products. If it weren’t clear enough before this report, IBM hammered home the message that it is a serious player in the ongoing AI race.
As a result, IBM’s stock closed the next day’s trading 9.5% higher, reaching price levels not seen since 2013.
It’s not too late to hitch your AI wagon to this big, blue tortoise
As much as I hate to say, “I told you so,” I’ve been trumpeting IBM’s undervalued AI business for months now. The thing is, Big Blue focuses on enterprise-class customers instead of consumers, adding many layers of testing, approvals, and due diligence reports between “hey, that’s a cool AI tool” and “here’s your multiyear contract.” That slowdown is enough to hide IBM’s ongoing growth from most investors.
So IBM is climbing the AI mountain slower than many of its consumer-oriented rivals, but you know the old fable where “slow and steady wins the race.” In this case, the tortoise is big and blue, and the stock still looks undervalued after more than a decade of bearish pricing trends. You can pick up IBM stock at 2.7 times trailing sales and 13.6 times free cash flows today, locking in a dividend yield of 3.7%.
In fact, you should consider doing it before an AI-powered growth spurt really takes off.
Anders Bylund has positions in International Business Machines. The Motley Fool recommends International Business Machines. The Motley Fool has a disclosure policy.
