Should You Consider Investing in This AI Stock Before 2025?

Are you in search of an undervalued opportunity in the artificial intelligence (AI) sector as we approach 2025? If so, it may be worth your while to evaluate a tech giant that is on the rise.

Recently, a hesitant market has begun to recognize International Business Machines (IBM) as a key player in the AI industry. This shift in perception has led to a significant increase in IBM's stock value, with a remarkable 37% gain in 2024. If we include reinvested dividends, the total return reaches an impressive 44%.

But the real question is whether IBM's stock is still a worthwhile investment after such a rapid rise. Is the company's growth potential still robust, or is it starting to fade? Let's analyze IBM's current standing as we head into 2025.

Considering IBM's Financial Landscape

At first glance, IBM's recent financial report might not seem compelling to investors.

The company's sales saw a modest increase of 2% year-over-year in the latest third-quarter results. This growth was primarily attributed to changes in foreign exchange rates. The earnings per share (EPS) also rose by 5%, bolstered by a slight decrease in the tax rate. While these outcomes are stable and in line with analyst expectations, they hardly spark excitement.

However, looking deeper into the numbers reveals a more nuanced story. The robust infrastructure segment did experience a 7% revenue decline, largely driven by a 19% decrease in the cyclical IBM Z mainframe division. This business fluctuates according to mainframe product cycles, and the next upgrade for IBM Z systems is slated for 2025. This upcoming release is expected to incorporate advanced AI features through IBM's proprietary AI chips.

In contrast to this cyclical challenge, IBM's software and services sectors showed resilience. Automation revenues increased by 13%, the Red Hat hybrid cloud business experienced a 14% boost, and AI revenues rose by 5%. While this AI growth figure may appear underwhelming when viewed independently—especially given the hype surrounding AI—other areas have compensated for the anticipated slowdown in mainframe performance.

Long-Term Vision for AI Contracts

IBM operates differently than many tech firms. Instead of chasing quick sales, it focuses on establishing long-term subscription and technical support agreements. This approach often entails a slower setup period, especially for complex technologies like generative AI systems. Potential clients typically navigate multiple rounds of technical evaluations, management approvals, and budget deliberations before committing.

Nevertheless, once these deals are finalized, IBM secures long-lasting and lucrative relationships. In spring 2023, IBM launched its generative AI platform, watsonx. Recently, the watsonx platform has secured over $2 billion in firm multiyear contracts. A single quarter later, this order book grew by an additional $1 billion, marking a 50% increase in just three months—indicative of a turning point. As IBM continues to finalize more AI contracts, it will gradually transform these paper agreements into actual sales.

Preparing for Growth After Years of Development

This slow, yet promising dynamic has been apparent since the introduction of watsonx. IBM's current trajectory reflects the culmination of a strategic shift that has taken nearly a decade to develop.

The AI-enhanced System Z mainframes set for next year provide a pivotal component to a multiyear business cycle aimed at growth. When combined with the increasing activity in AI contracts, it is anticipated that revenue and cash flow will see significant improvements.

In the words of IBM CEO Arvind Krishna, during the third-quarter earnings call, "Our portfolio is well positioned to deliver an upward inflection in growth in 2025." This statement suggests that IBM expects to impress Wall Street with its future results.

Is IBM a Good Deal in the Expanding AI Industry?

Although IBM has experienced an uptick in stock price—which naturally affects its valuation ratios—the company’s shares still appear competitively priced compared to other AI powerhouses. Key metrics like price to sales and price to free cash flow suggest that IBM stands out as a budget-friendly option when juxtaposed with giants 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	$3.30 trillion
Microsoft	44.7	12.8	$3.2 trillion

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

The potential for growth in the AI sector excites me, and I'm comfortable with a patient investment approach amid this transformative evolution. Therefore, I highly recommend considering an investment in IBM shares while they remain attractively priced. Waiting on stocks like Nvidia and Microsoft may be prudent.

Overall, next year’s business expansion is likely to significantly outpace the modest gains witnessed in 2024, particularly with ongoing developments linked to IBM’s watsonx contracts.

AI, Investment, Stock