Is IBM's Bet on AI Starting to Pay Off?

You might not think of IBM (NYSE: IBM) as an artificial intelligence (AI) expert. The tech veteran is famous for its early PC computers, business-critical mainframes, and unmatched portfolio of consulting services. But IBM is never the first name that springs to mind in the AI conversation.

That perception should change very soon. The company has been a quiet AI leader for decades already, betting a large chunk of the proverbial farm on this technology way back in 2011. The rest of the tech sector is finally joining the party, setting IBM up for stunning long-term growth amid the AI boom.

IBM's long history of AI innovation

IBM's AI expertise is unquestionable. The company popularized machine-based thinking decades ago, when its Deep Blue chess computer beat world champion Garry Kasparov in a match of six games. That was a game-changing achievement of supercomputers in 1997.

Nowadays, human chess champions rely on computers for ultra-accurate game analysis. Beating a modern chess engine playing at full strength is almost unthinkable in 2024.

The IBM research that led up to that headline-writing moment started decades earlier. Have you heard of the IBM "shoebox" system that showed off rudimentary human voice recognition at the 1962 World's Fair?

IBM's AI research never slowed down. The company had about 3,000 AI patents in 2017 and 7,300 four years later. Zooming in on the generative AI frenzy, IBM has more patents in this specific field than Alphabet or Microsoft.

If you're searching for leading-edge AI innovation, IBM should be the first place you look.

IBM's strategic emphasis on enterprise-friendly AI

Apart from the Kasparov challenge, you don't see IBM's AI work in the headlines very often. That's because the company prefers creating business-class systems to be used by other businesses. Other companies are free to come up with flashy toys in the consumer-facing space.

Meanwhile, Big Blue keeps building AI platforms with unbreakable security, audit trails explaining where the generated data came from, and other business-friendly features. Consumers may not care much about these qualities, but business leaders do. That's where the big long-term contracts come from.

IBM effectively sat out the early days of the ongoing AI boom. Management was thrilled to see AI ideas going mainstream in a big way, since the broader public interest should result in soaring demand for AI solutions in the long run. Tomorrow's consumer electronics, cars, and smart home systems will make today's ChatGPT trinkets blush in digital embarrassment.

Many of them will rely on IBM's AI tools services.

Big Blue's AI future relies on watsonx

Big Blue's generative AI business is getting off the ground in a big way.

The watsonx generative AI platform was launched in the spring of 2023. By the second quarter of 2024, watsonx had more than $2 billion of multiyear subscription orders. Three months later, the watsonx orders had soared to $3 billion. It's not just the software that's flying off the virtual shelves, either. Most of the watsonx orders are for consulting services, helping clients squeeze more value out of watsonx and other generative AI systems.

Yes, IBM is an AI pioneer. The technology will boost the company's financial results for years to come, and this success story should move out of Wall Street's shadows over time.

For now, IBM's stock trades at a modest 15.6 times free cash flow and 3.1 times sales. The stock could double in price and still look affordable next to Alphabet, or triple and remain comparable to Microsoft's lofty valuation ratios.

In my eyes, IBM is the stock to buy if you're thirsty for AI expertise at a reasonable price. The market-moving headlines will come. Just give this centennial company some time.

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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 Alphabet and Microsoft. The Motley Fool recommends International Business Machines and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.