Where Will IBM Be in 3 Years?


IBM’s AI business is one of those overnight success stories that were years in the making. Check out where Big Blue is going next — and how.

This is an important moment in the centennial history of International Business Machines (IBM 1.07%).

The technology giant took a sharp turn in 2012. Everyone else had just started to copy Big Blue’s business model of providing every technology solution under the sun, from servers and storage to software and consulting services. But when Ginni Rometty took over the CEO office from industry legend Sam Palmisano, it was time for a change.

Rometty sold or spun off most of IBM’s hardware segment, ranging from laptops and desktops to storage and Unix servers. Slow-growing services were also up for grabs, leading to the creation of the stand-alone Kyndryl business out of IBM’s infrastructure services arm.

Meanwhile, IBM refocused its mighty assets, talents, and know-how on a small selection of future growth opportunities. After eight years at the helm, Rometty handed the reins to cloud and cognitive software pioneer Arvind Krishna in 2020. Under Krishna’s seasoned hand, the new and improved IBM is all about cloud computing and artificial intelligence (AI). Other tech titans can’t match this company’s combination of software, services, and consulting expertise, strictly focused on business-class customers.

And the time has finally come to take advantage of the revised strategy. AI is a hot topic right now, driving a marketwide surge of interest and investing. IBM’s unshakable focus on enterprise customers may have slowed down the company’s financial gains from the roaring AI frenzy, but Big Blue is entering the AI scene in a big way.

IBM’s cloud-based AI blueprint for the future of tech

You don’t have to take my word for it. At a recent industry conference, CFO Jim Kavanaugh sketched out IBM’s plan for the next few years.

“You’re seeing a fundamentally different IBM today, an IBM that’s focused on the two most transformative technology shifts, we think: hybrid cloud and generative AI,” Kavanaugh said. “We are extremely excited about the secular growth opportunity of generative AI. And we have repositioned IBM around what we believe are the two most transformative technologies, one being hybrid cloud and one being generative AI — and the synergistic effect of those two.”

Kavanaugh sees an addressable market worth several trillion dollars a year in this explosive combination. IBM doesn’t have to dominate the sector in order to pocket game-changing revenue and profits from cloud-based generative AI platforms.

IBM’s massive consulting edge

This is where IBM’s legendary consulting expertise comes into play. AI rivals such as Microsoft (MSFT -0.23%) or OpenAI may have powerful generative AI systems on hand, but they lack Big Blue’s decades of supporting services. So when a potential client decides to jump into the AI waters but isn’t sure how to install, maintain, and use this fancy new tool, IBM will gladly put in a lot of billable hours in that supportive role.

How serious is IBM about this competitive advantage? Let’s take a quick look at the latest round of earnings calls, for example.

  • Microsoft executives and curious financial analysts mentioned AI more than 70 times in January’s second-quarter call, including 12 mentions of generative AI partner OpenAI. The concept of consulting came up exactly once, in the context of a major AI customer whose in-house consultants use AI to boost the productivity.
  • One day earlier, Google parent Alphabet (GOOG 0.32%) (GOOGL 0.23%) talked about AI 82 times in its fourth-quarter call. Consulting came up once, as CEO Sundar Pichai explained how Alphabet partners with consulting giant Accenture to install and support AI services.
  • One week earlier, IBM’s fourth-quarter call featured 43 mentions of AI by the leadership team and another 12 discussions of the Watsonx AI platform. Krishna called the consulting business “a core driver of our value proposition for clients.” This segment brought in $20 billion of revenue in 2023, or 32% of IBM’s total sales. If that contribution wasn’t worthy of water-cooler talk, I don’t know what is. Management talked about “consulting” on 34 occasions.

The Big Blue value play on AI

Big Blue stands out as a unique success story in the booming AI market — and Wall Street is still waking up to this opportunity.

IBM’s fourth-quarter report lit a fire under the stock, but it still trades at a serious discount to the current batch of AI-driven market darlings. For instance, Alphabet’s price-to-sales and price-to-free-cash-flow ratios are about twice as generous as IBM’s. Double them again and you land near Microsoft’s valuation metrics. Let’s not even talk about the most mind-boggling AI valuations, which make even Microsoft look cheap.

Fast-forward to 2027, and we might see IBM’s AI-with-a-consulting-edge becoming the go-to solution for businesses, driving not just adoption but seamless integration. This move could see the company redefine industry standards and investor expectations. And in the meantime, IBM’s stock is value priced.

So if you’re itching to invest in the soaring AI market, and also looking for an affordable stock with strong growth prospects, IBM should fit the bill. IBM isn’t just a value play at this threshold between two eras; it’s a visionary leap into the tech sector’s future.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Anders Bylund has positions in Alphabet and International Business Machines. The Motley Fool has positions in and recommends Accenture Plc, Alphabet, and Microsoft. The Motley Fool recommends International Business Machines and recommends the following options: long January 2025 $290 calls on Accenture Plc, long January 2026 $395 calls on Microsoft, short January 2025 $310 calls on Accenture Plc, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.



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