IBM: BIG GROWTH PROSPECTS FOR BIG BLUE?

By Tejas Shankar, Equity Analyst 

The Buzzword that is always thrown around nowadays is “AI” with top companies typically being NVIDIA, Google, META and more. But what is a name that has been under the radar and has been a prominent player in the market for a while? IBM. AI companies’ valuations and capital expenditures(CAPEX) are through the roof,  which many analysts now find concerning. But IBM may offer the stability you are looking for. IBM, or International Business Machines, has been in the integrated software solutions and services for over 70 years. But could IBM be the perfect balance between a steady dividend-paying stock and a company with significant exposure to AI?

IBM has been around since the early 1910s, shipped its first mainframe in 1952, and is now at the forefront of software solutions all across the globe. They survived multiple wars, recessions, and a global virus. Their core business segments include software, hybrid cloud computing, consulting & financing, among others. Their longevity has been on full display with their relatively horizontal historical price and steady growing dividends. Over the years, IBM earned the affectionate nickname “Big Blue,” alluding to the company’s status as a fixture of corporate America. 

When it pertains to AI in equity markets, hyperscalers and chip makers have been spending an exorbitant amount of money on data centers and other AI infrastructure, with a large proportion of the spending in memory chips. A major concern brought up by many is the rise in AI CAPEX, leading to inflated valuations that are purely driven by future growth expectations. For example, Amazon raised its spending guidance to $200 Billion for 2026, up from the $131 billion in 2025. Even for the mighty Amazon, that is an awful lot of money. Though not all of their CAPEX is spent on AI, a large portion is estimated to be allocated to AI Infrastructure, specifically to expand Amazon Web Services (AWS). The sticker value of some of these Magnificent 7 Stocks and their AI spending spree doesn’t paint the full picture, as the increase in CAPEX is mainly attributed to the rise in the price of memory. Real output isn’t increasing by the astronomical amount that many are making it out to be. Though people are drawing parallels with the Dot Com bubble to an AI bubble, there are stark differences between the two, and IBM is no exception. IBM CEO Arivind Krishna called the $8 Trillion AI spending a mirage. While other AI companies focus on building up infrastructure, IBM focuses on its own in-house AI model. This discipline could be the catalyst that allows IBM to capture AI demand without the inflated valuations and risks of runaway CAPEX.

Balanced Growth?

IBM has been providing software solutions as its core business, as well as consulting, & financing, being other smaller segments. But in recent years, they seem to have joined the MAG 7, which plans to increase AI spending to over $680 Billion. Though their price has been pretty horizontal, especially in the 2010s, IBM has seen a reemergence, with promising growth, even outperforming the S&P 500 over the past couple of years. While the S&P 500 is up 73% in the past 5 years, IBM is up over 127%. So though history has shown limited growth and horizontal prices for IBM, they have recently been rewriting the narrative. In furthering operations, IBM is going through a merger & acquisition of Confluent, a data streaming platform, allowing IBM to simplify operations as it takes further leaps. It is corporate restructuring practices like these that signify confidence and optimism in a company.

Despite all the AI hype, IBM’s edge in all of this may just be quantum computing. IBM was early to AI with Watson in 2011, and they may be on track to do the same with quantum computing. Though they are facing significant competition, their CEO sees this competition as the driver to further this technology and also a signal that quantum computing is next up. He additionally stated that he expects meaningful returns from their quantum computing business by the late 2020s and early 2030s. In the face of all of this promise, the concerns among analysts and managers across the industry are the overpromising and underdelivery from the company, as they have done with AI in the past.

IBM isn’t just built on hype; rather, they have real results in its financials. After IBM’s most recent Q4 earnings, investors are feeling optimistic with the company pulling 6% revenue growth, its highest in many years. Additionally, IBM has made prominent strides in commercializing Gen AI, with its book of business exceeding $12.5 Billion, its largest quarterly jump. Management continues to increase its guidance, suggesting that the internal confidence will lead to accelerated growth. Along with this accelerated growth, IBM has done an excellent job handling its debts, with its Debt-to-equity ratio falling YoY, sitting at around 2.00 at FY24-end. In addition, they saw $14.7 billion free cash flow(FCF), up 16% YoY, which is the best they have seen in over a decade. IBM’s FCF can comfortably cover its CAPEX, something some other tech giants can’t say. Oracle serves as a prime example of a company that is taking on a large sum of debt, as it was just announced that the company plans to raise another $45 to $50 Billion for its construction of data centers. Though Oracle may have more promise if its CAPEX leads to serious revenue, it is currently heavily relying on the bond and options markets to raise capital(bonds & Credit Default Swaps), a practice that IBM isn’t implementing, as its FCF is covering all of its CAPEX. IBM’s measured approach to its spending is the perfect balance that could serve as a strategic advantage. Something investors have been drawn to for decades is its dividends, which they have been paying out to shareholders for a century. As a dividend aristocrat, meaning they have increased their dividend payments for over 25 years, with a current payout of $6.72, IBM provides stable income with exposure to rapidly growing sectors, with its AI and quantum computing segments. A common metric used by many to get a foundational understanding of a company’s valuation is price to earnings, which gives a multiple that a company is trading at from its earnings. IBM’s P/E or Price to Earnings, is 23.53, slightly below that of  Oracle at 30.10 and NVIDIA at 45.24, just to name a few heavy AI Spenders(average). This means that IBM may represent a better value for the thifty investor. 

So with all of this being said, what do we see in IBM’s future?c. Steady growth is what IBM has shown with its software segment for many years, and what they plan to replicate on the AI & quantum computing train. If their ambitious projects, such as moving to enterprise-grade AI solutions, quantum computing, and hybrid cloud computing, continue to grow along with their already existing software and consulting segments, IBM could actually see unprecedented expansion, larger than what the markets are pricing in. On the contrary, IBM is aiming to emerge in a highly competitive market. If they aren’t able to nail their execution, plus overpromise and underdeliver as they have in the past, which has caused stagnant growth, returns could begin to suffer again. Despite these bear and bull situations, IBM is in an excellent spot, especially recently. With their proven track record, promising cash flows, and reliable dividends, IBM provides investors with exposure to AI without the flashy name and the risk.