If you haven’t bought any artificial intelligence (AI) stocks yet, you might feel like you missed the boat. Shares of AI experts such as Nvidia and C3.ai have doubled or tripled over the last year, riding the tailwind of massive interest in generative AI tools such as ChatGPT. Surely it’s too late to jump aboard that skyrocketing bandwagon by now.
Right?
Well, not so fast. Some of the best AI specialists actually missed that boat, too. Their stocks have been left behind the general frenzy, giving astute investors a chance to pick up great AI investments for pennies on the future dollar. In particular, International Business Machines (IBM 0.70%) offers a tempting combination of modest share prices and market-defining AI expertise.
Here’s why I think Big Blue’s stock is a great buy right now.
Wall Street is full of IBM skeptics
Let’s get right to the heart of the problem. Many analysts don’t see IBM as an AI investment these days, and investors have absorbed that skepticism. For instance, Jefferies analysts recently called Big Blue a “hidden AI play” with robust long-term exposure to the AI theme but few immediate catalysts.
In other words, firms like Jefferies don’t believe that IBM’s stock deserves the premium valuations you see for market-darling AI plays like C3.ai and Nvidia. As a result, IBM hasn’t even boarded the AI bandwagon yet. Profit-based valuation charts don’t make a lot of sense since C3.ai is unprofitable so far, but here’s how IBM compares to these AI-sector flagships in terms of price-to-sales (P/S) ratio:
IBM PS Ratio data by YCharts
As you can see, IBM’s P/S ratio has stayed in the low single digits throughout the ChatGPT-inspired AI furor. Meanwhile, process automation specialist C3.ai trades at 10.5 times sales and Nvidia’s stock soars around 30 times sales.
Beyond the numbers: IBM’s real AI story
That’s well and good if IBM really is lacking a robust AI business. However, that’s not what I see at all.
IBM has been exploring artificial intelligence since before many of its rivals were founded. The journey started in the 1950s when IBMer Arthur Samuels created a self-learning checkers-playing program. The famous Deep Blue system that beat chess world champion Garry Kasparov in 1997 also came from IBM’s Amherst headquarters, followed by the Jeopardy!-playing natural language interpretation of the Watson platform in 2011.
Lessons learned from these inventive AI adventures (and the decades of research in between) have been packed into IBM’s latest AI product, a cloud-based data analysis studio known as Watsonx. This platform helps IBM’s customers — mostly large corporations, not enthusiasts or small businesses — build, train, and make use of powerful generative AI tools relying on their own business data. If that doesn’t sound like a serious AI catalyst to you, I simply don’t know how to convince you.
IBM is happy to leave consumer-grade playthings to other companies, focusing strictly on an enterprise-grade clientele with the watsonx system. As a result, I expect a rather slow burn as prospective customers often must pass their new tools through many levels of system testing, integration work, management approval, and budgeting. But when the floodgates are open, IBM should enjoy a deluge of AI orders with large and long-term contracts.
You should consider buying IBM stock
I don’t know whether IBM’s AI tipping point will come this year or in 2025, but I’d be shocked if the client-grabbing process drags on any longer than that.
And I really don’t understand why IBM’s bright AI future is so opaque to investors and analysts today. AI has been infused into everything IBM does, including customer-facing products and internal systems. By my analysis, it’s only a matter of time before Big Blue’s pioneering AI expertise starts to generate big green piles of cash. Until then, you can pick up IBM shares at the modest valuation of 2.5 times sales, 22 times earnings, and 12.5 times free cash flows. The likes of Nvidia and C3.ai just can’t compete with this deep-discount value proposition.
IBM isn’t aiming to ride the booming AI market’s coattails, but instead to lead from a very specific niche up front. This tech giant is an AI leader, not a copycat or a wannabe. You don’t want to be left empty-handed when market makers finally realize what’s going on here. That’s why IBM is my best AI investment idea in early 2024.
Anders Bylund has positions in International Business Machines and Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends C3.ai and International Business Machines. The Motley Fool has a disclosure policy.
