Is IBM Stock a Buy?
Key Points
IBM's stock has dropped 22% over the last three months, but the weakness traces to a cyclical mainframe lull.
Big Blue's generative AI consulting book has reached $5.5 billion.
Shares trade at 17.3 times forward earnings and sit 31.8% below June's all-time high.
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International Business Machines' (NYSE: IBM) stock isn't setting the world on fire right now. As of Oct. 1, the tech veteran's shares have dropped 2% in a month and 22% over the last quarter. Big Blue's stock is changing hands at 3.1 times trailing sales and 15.5 times free cash flow -- lukewarm multiples usually attached to slow-growth retailers rather than innovative tech giants.
Big Blue's boring advantages
Here's a fun contrast. While the biggest names in tech pour hundreds of billions of dollars into AI data centers and fight over consumers' attention, IBM is leaning back in a comfortable chair. It already owns mainframes and Linux machines that run the world's banks, and those customers aren't going anywhere.
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IBM's stability doesn't make headlines. Mainframes are cyclical, and the latest quarter was a lull. But a lull in a business that makes up only 15% of IBM's total revenues is hardly a crisis. At the same time, Red Hat's OpenShift grew 29%, and distributed infrastructure sales jumped 37% year over year. Yet, IBM's stock crashed in July after reporting record results.
I'm not done talking about IBM's unique qualities. There are consulting services, the cash-cow nobody brags about at dinner parties. IBM's generative AI consulting book alone is $5.5 billion and growing. Helping other companies figure out how to install, manage, and use AI is a tidy business when the giant companies have budget constraints.
IBM's AI strategy is refreshingly low-drama, too. There's no frontier model, no multibillion-dollar GPU land grab. Just software for the places where code can't leave the building, like the self-hosted version of its Bob development tool.
Image source: The Motley Fool.
Paid to wait
Meanwhile, shareholders collect a 3% dividend yield while waiting. Only 2.4% of Big Blue's float is sold short, so almost nobody is betting against the stock. Almost nobody is loudly betting for it, either. At 17.3 times forward earnings and 31.8% below June's all-time peak, that seems backward.
Mainframe cycles will keep being bumpy. Patient investors can live with that. I think IBM's stock is a fantastic buy right now.
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Anders Bylund has positions in International Business Machines. The Motley Fool has positions in and recommends International Business Machines. The Motley Fool has a disclosure policy.
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