KD - IBM: Back Of Envelope Math Suggests A Big Tech Bargain

2024-01-25 17:45:01 ET

Summary

• IBM stock closed up about 10% after reporting strong earnings and guidance on revenue growth exceeding expectations.
• IBM has been a leader in AI projects for 30 years. They're set to make incrementally more money as interest in AI increases without the stock carrying a huge valuation.
• IBM's early history with artificial intelligence is a puzzle for investors.
• Might expectations be too high for flashy AI stocks? And also might old hands like IBM be in better shape than the market realizes in terms of monetizing AI?
• IBM stock is now a bargain compared to the market, with a dividend yield close to 4% and positive growth prospects.

In 1997, a New York City chess match changed the world. The opponents: World chess champion Garry Kasparov and IBM's ( IBM ) Deep Blue computer program. Deep Blue squeaked out a win against Kasparov as the world watched, symbolically ending the age of man and beginning the age of machine. IBM stock soared over the remainder of 1997, 1998, and 1999. However, today, you would have done better investing in companies far more mundane, and a little better by simply investing in index funds. IBM stock has been far from a long-term loser. The stock returned about what the market has over time. If you look at price return only you'll miss the impact of the company's fairly generous dividend payouts over the years. But the stock is perhaps a cautionary tale in investing in artificial intelligence at any price. IBM shocked the world with early advances in AI with Deep Blue, which I'd argue partially led investors to place their profit expectations at levels that the company was not able to meet. Later, IBM's Watson bested its human competitors and won $1,000,000 playing Jeopardy! in 2011. However, IBM didn't promptly make trillions off of AI. IBM's business and stock price have been fairly stagnant since 2011, lagging far behind the market at large. But now, after some surprisingly strong earnings from IBM, investors are starting to revisit the idea that AI projects will always just be a sideshow for the company. Here, I think bulls may have a point as IBM's valuation doesn't place a terribly high bar....

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