With artificial intelligence (AI) representing the hot ticket in the broader technology ecosystem, it’s tempting to chase the flavor of the week. However, patient investors may want to consider legacy tech stalwart IBM (NYSE:IBM) instead. Fundamentally, the company belongs on your AI must-watch list because of its proven prowess in a possibly overcooked sector. Therefore, I am bullish on IBM stock.
IBM Stock Easily Wins the Valuation War
With the seeming end of the bear market, reinvigorated sentiment pushed the S&P 500 Index (SPX) up over 15% so far this year. However, the tech-centric Nasdaq Composite has been the real winner, gaining nearly 32% since the January opener. Nevertheless, moving forward, concerns center on potentially holding the bag. That’s why valuation matters, perhaps more so than ever, and IBM stock wins the valuation war quite easily.
While it’s not a pure apples-to-apples comparison, Nvidia (NASDAQ:NVDA) soared this year – gaining around 200%, thanks to its implications for advancing various AI protocols. Basically, as a specialist in graphics processing units (GPUs), Nvidia undergirds the most computing-intensive endeavors. Obviously, AI takes the cake here. So, as digital intelligence becomes more complex, the tech sector will likely require higher-capacity GPUs.
At the same time, some analysts sounded the alarm that NVDA appears overvalued. While shares continue to rise from strength to strength, it might not necessarily mean the analysts are wrong — just wrong now. Currently, NVDA trades at a forward (projected) earnings multiple of 56. In contrast, the forward price-earnings ratio for the semiconductor industry is only 28 times.
On the other end of the spectrum, IBM stock trades at a forward earnings multiple of only 14.4. Even when stacked against the semiconductor equipment sector’s forward PE ratio of 20 times, shares of “Big Blue” offer a very compelling discount. It goes without saying that it’s a massive discount compared to NVDA.
To be sure, Nvidia, in many ways, justifies its underlying enthusiasm. Again, its GPUs will likely see increased demand as AI becomes further integrated into society. However, investors are arguably less likely to fear holding the bag with IBM stock, which is down 3% year-to-date.
Big Blue Benefits from Big Business
Unfairly, the case for IBM stock often gets clouded with the underlying enterprise’s prior missteps. Going back several years, the company admittedly relied too heavily on its legacy operating units. It also responded slowly to burgeoning trends such as cloud computing. However, the tech giant also course corrected. What’s more, Big Blue also made some lucrative steps early on, particularly with AI.
Pay attention to tech-related headlines, and much of the conversation centers on AI — how it might improve lives, bolster efficiencies, and shift paradigms. The discussion also lends weight to legitimate concerns that AI may replace certain job functions. In the grand scheme of things, society is in the early innings of the AI takeover. However, the beauty of IBM stock is that the tech firm already demonstrated the innovation’s practicalities.
Even more, several major brands utilize the company’s digital intelligence protocol called IBM Watson. We’re not talking about esoteric applications but legitime use cases that benefit enterprise-level clients and their customers.
One profound example comes from tax-preparation service and consultancy firm H&R Block (NYSE:HRB). With the U.S. tax code totaling 74,000 pages, it’s virtually impossible for mere mortals to know everything. However, Watson is able to rifle through the code, thus identifying potential deduction opportunities. In addition, Watson can immediately integrate fresh changes to the law, providing additional reassurances for taxpayers.
Passive Income May Win Investors Over
Granted, when strictly looking at IBM stock from its chart performance alone, other ideas may prove more appealing. For instance, in the trailing year, IBM produced a negative 3% return. In the past five years, the stock has fallen by 1%. However, Big Blue beats out numerous tech plays thanks to its passive income.
Specifically, IBM’s dividend yield stands at 4.81%. In contrast, the tech sector’s average yield sits at a hair above 1%. In addition, the company has grown its dividend for the past 23 years. More than likely, management will want to keep this trend going since it represents an excellent selling point.
Is IBM Stock a Buy, According to Analysts?
Turning to Wall Street, IBM stock has a Moderate Buy consensus rating based on four Buys, five Holds, and zero Sell ratings. The average IBM stock price target is $146.56, implying 9.60% upside potential.
Also, on TipRanks, IBM stock has an 8 out of 10 Smart Score rating. This indicates strong potential for the stock to outperform the broader market.
The Takeaway: IBM Stock is Unfairly Overlooked
For those interested in AI-related investments, several names come up before IBM stock. However, these ideas tend to be speculative. And if they’re not, they could be significantly overvalued, such as the case with Nvidia. While Big Blue lacks “pizzazz,” it makes up for it with its proven AI business. Plus, a generous dividend can’t hurt during this confusing market cycle.
