This legacy hardware giant is becoming a key player in AI…
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From the desk of Miles Everson: Happy midweek! I hope your week is going well. Every Wednesday, I talk about investing. By doing this, it is my hope to help you achieve better gains for your investment portfolio and boost your financial well-being as a result. |
Today, let’s talk about AI and how this legacy tech giant is quietly making a name in the space.
Continue reading below to know why there’s so much more to the AI space than meets the eye.
This legacy hardware giant is becoming a key player in AI…
It seems the artificial intelligence (AI) boom has started to wane, leaving investors worried as they wonder if the peak in this space is already over.
Let’s take Microsoft for example: The AI standout has dropped about 10% from its June 2024 high. Meanwhile, data-center server provider Super Micro Computer is down nearly 50% since peaking in March of the same year.
As a result, investors have started talking about a “rotation” out of AI into cheaper and smaller stocks.
They’re not wrong as some of the most popular opportunities in today’s market are far too expensive.
However, there are still plenty of companies helping the AI boom that still perform well.
So, for today, we’ll take a look at a tech giant that has been quietly winning more AI business.
A Giant Making Moves
In July 2024, AI stole the spotlight in IBM ’s second quarter earnings.
AI bookings surged past USD 2 billion since mid-2023, doubling the numbers from earlier in the same year.
What’s more?
About three-fourths of those bookings come from AI consulting.
For those of you who might not know, IBM is gaining lots of influence in the space as it has been transitioning from a legacy hardware giant to a key player in high-growth software and AI services.
This strategic shift led to a 7% revenue boost for IBM’s software unit, outpacing analyst expectations.
Even though the company’s consulting segment saw a slight dip, overall revenue grew 2% year over year, reaching USD 15.8 billion.
Aside from this, IBM has also been on an AI buying spree recently as it picked up cloud computing automation specialist HashiCorp and Apptio , the creator of an AI tool that helps companies make spending decisions related to tech.
With these developments in mind, IBM’s commitment to AI seems less like a fluke and more like the beginning of a trend.
Unfortunately, investors aren’t treating it that way, as can be seen through the Embedded Expectations Analysis (EEA) framework of Professor Joel Litman and his team at Altimetry Financial Research .
The EEA is used to look at a company’s current stock price and from there, what the market expects from a company’s future cash flows is calculated.
After that, Professor Litman and his team compares that with their own cash-flow projections.
In other words, the EEA shows how well a company has to perform in the future to be worth what the market is currently paying for it.
IBM’s Uniform return on assets (ROA) has been trending higher in recent years. However, investors expect that growth to ease, with returns dipping to 20% by 2028.
Simply said, investors aren’t paying attention to IBM’s improved AI bookings, treating the company like any old tech story that has played itself out.
Many folks don’t link IBM with cutting-edge AI… and that’s what makes the company a promising investment as it has quietly been making moves in the space and should continue to outperform relative to expectations.
So, what does IBM’s recent shift to AI tell you?
Investors have to get more picky in the AI space. You can’t just buy any business that uses the words “AI” and expect to get rich quick.
What you should do instead is to keep a closer look in the space and to see lesser-known AI beneficiaries so that you can invest in them.
As more people catch on to IBM’s strategy, its under-the-radar status might not last much longer, so you should be on the lookout for similar companies.
Hope you’ve found this week’s insights interesting and helpful.
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Stay tuned for next Wednesday’s The Independent Investor!
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