When it comes to artificial intelligence and machine learning, chances are, you’re not thinking about legacy technology giant International Business Machines (NYSE:IBM). While the sentiment is understandable, it could also be a mistake. With investors looking elsewhere, “Big Blue” has been quietly rallying in the second half of this year. I am bullish on IBM stock.
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IBM Stock Presents Tremendous Comparative Value
Undoubtedly, the framework of AI and ML protocols centers on semiconductor juggernaut Nvidia (NASDAQ:NVDA). With its graphics processing units undergirding the physical machinery fueling generative AI platforms, NVDA continues to soar above the clouds. However, at some point, burnout may materialize, which cynically bodes well for IBM stock from a comparative value standpoint.
Don’t interpret the above statement as any form of disrespect to Nvidia. As TipRanks reporter Vince Condarcuri mentioned, the GPU specialist absolutely smashed expectations for its second-quarter earnings report. Posting adjusted earnings per share of $2.70 on revenue of $13.51 billion, Nvidia comfortably exceeded already lofty consensus targets.
However, as TipRanks contributor Joey Frenette pointed out days prior to the Q2 disclosure, the stakes for NVDA appear too high. In immediate hindsight, Frenette may seem a tad too pessimistic. Still, the point he makes about the difficulty in determining when the boom will turn into a bust is a valid one.
Ultimately, it comes down to simple math. It’s easy to raise expectations. However, it becomes increasingly difficult to match them. To use a sports analogy, even the ultra-dominant U.S. women’s national soccer team couldn’t three-peat as a World Cup champion.
Cynically, this backdrop favors IBM stock. In 2022, IBM spent a total of $6.57 billion in research and development, much of which was allocated to AI. For context, that’s considerably more than the market capitalization of up-and-coming digital intelligence specialists like SoundHound AI (NASDAQ:SOUN).
Nevertheless, few want to give IBM stock a shot. Frankly, this narrative may change in due time.
Big Blue Deserves Its Big Break
While other public AI enterprises boast about their robust double-digit and even triple-digit returns so far this year, IBM stock appears almost completely irrelevant. Since the January opener, shares have gained about 5%. Still, over the trailing six months, Big Blue gained over 12%. It’s possible, then, that IBM could get its deserved big break in the second half.
To be fair, the criticisms surrounding IBM stock carry legitimacy. How could they not? Over the past five years, shares have gone practically nowhere. Predominantly, even when IBM has been at the forefront of digital intelligence – the company’s Deep Blue beat chess world champion Garry Kasparov in 1997 – it largely failed to translate its achievements into investment success.
One specific sticking point is the tech stalwart’s public failure to transform healthcare with AI. As per multiple publications, IBM’s former business unit Watson Health – now known as Merative L.P. – attempted to spark efficiencies in the healthcare industry, specifically regarding cancer diagnostics tools. However, the data did not incorporate real patient data but rather hypothetical cases, ultimately yielding ineffective results.
In other words, beating a grandmaster at chess is one thing because there are only so many rational moves to make within predefined (limited) parameters. However, dealing with cancer diagnoses represents a whole new ballgame due to the underlying dynamism.
Still, IBM’s failure doesn’t automatically mean that other enterprises will succeed in healthcare or other tricky realms. For example, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) also stumbled in its efforts to drive efficiencies in healthcare via AI.
In other words, holistic AI is still a work in progress. However, given Big Blue’s deep pockets, it can eventually win digital intelligence’s long game.
Attractive Attributes Should Entice Contrarians
For investors patient enough to wait for IBM stock’s resurgence, several appealing factors stand out. First, shares trade at only 15.1x forward earnings, which is undervalued compared to multiple tech subsegments. In contrast, NVDA runs a forward earnings multiple of 60.2x, which almost begs for a correction down the line.
Another bullish factor to consider is the generous passive income. Right now, IBM features a dividend yield of 4.64%, well above the tech sector’s average yield of 1.025%. Plus, Big Blue has a dividend growth track record going back 23 years.
Is IBM Stock a Buy, According to Analysts?
Turning to Wall Street, IBM stock has a Hold consensus rating based on three Buys, seven Holds, and one Sell rating. The average IBM stock price target is $143.20, implying 0.24% downside risk.
The Takeaway
While investors are more than free to jump aboard the hype train of other AI powerhouses, IBM has been doing this for a long time. It’s possible that rather than a sprint, AI becomes a long marathon on a hot day. Under this context, Big Blue has the pockets and acumen to engage in a war of attrition. Therefore, IBM stock appears to be of great value for patient contrarians.
