But you really should, and I think you'll get there soon enough. There's a generative AI boom happening right now, and Big Blue is quite happy to watch the public drama unfold from the sidelines. You see, the company has been laying the foundation for its own AI empire for years, and that effort is starting to pay dividends.
IBM will never rival ChatGPT or Gemini with consumer-friendly AI chatbots, but I'm talking about a long-term AI giant in the business world. Here are three reasons you should keep an eye on IBM and its AI expertise.
IBM has been a computing heavyweight since the early days of punch cards and vacuum tubes. It started working on machine learning in the 1950s, powered by its unique range of mainframe systems. That research has continued uninterrupted, with highlights such as the Deep Blue chess computer beating Garry Kasparov in 1997 and the Watson AI platform defeating human Jeopardy! champions at their own game in 2011.
And the company isn't slowing down. IBM has more AI patents than any other American company and keeps filing the most AI patent applications every year. The progress may not be obvious to casual observers, but IBM is building an unrivaled portfolio of insights and patented technologies in the AI space.
If IBM had all this AI expertise ready to go, why hasn't it rolled out AI chatbots and image generators that put the ChatGPTs and Well-E systems to shame? Because that's not how Big Blue does business.
This company serves the community of enterprise-class businesses above all else. Other companies are free to explore the fickle consumer market while IBM builds a portfolio of AI tools with ironclad security, audit-ready data flow, and is supported by an army of IBM consultants.
Stop me if you've heard this before, but IBM's favorite customer class takes extra time to implement new technologies.
Pushing your business data into a new AI system for deep analysis should not be taken lightly. The proposed system must be tested with security and performance in mind, not to mention building a costs and benefits model. The buyer's tech teams must also convince their budget-holding managers that it's a good idea, perhaps on several levels of middle and upper management. This takes time.
On the upside, these precursory steps often result in lucrative long-term contracts -- and it's going to be a rock-solid revenue stream. Drop-in replacement alternatives may exist, but they would also have to go through the same testing with significantly superior results. Once IBM's solution is in, it's going to have staying power.
That's where Big Blue's AI solutions stand today. The company introduced its Watsonx generative AI platform last year and already has more than $2 billion of contracts in place. It's not all software, of course, but a mix based on IBM's greatest competitive advantage.
"The mix is roughly one-quarter software and three-quarters consulting signings," CEO Arvind Krishna said in July's second-quarter earnings call. "Our early leadership positions us for long-term success in this transformational technology, which is still in the initial stages of adoption."
Big Blue's stock has started to rise, but it still looks undervalued. Share prices are up by 63% over the last year. Yet, the stock is changing hands at just 17 times free cash flow and 3.4 times sales. It could double or triple in price and still look affordable next to AI market darlings such as Nvidia or Microsoft. And don't forget about the generous dividend policy, which works out to an annual dividend yield of 2.9% at these modest stock prices.
There you have it. IBM's AI expertise is a serious business advantage, and the resulting contracts have started to roll in. It's still early, and many investors haven't caught wind of Big Blue's growing AI footprint yet, so the stock remains affordable.
I highly recommend picking up a few shares of this quiet AI innovator while the stock is cheap. IBM shouldn't stay in Wall Street's shadows much longer.