A Calmer AI Investment: IBM Offers Proven Cash Generation and a Lower Volatility Ride

IBM offers AI exposure with a 0.70 beta, providing a calmer ride than Nvidia or Microsoft. The company's free cash flow rose 55% over three years despite modest revenue growth. The stock is down in the last month and quarter and sits below its 52-week high, making it a tempting setup for new money. IBM's valuation is modest, with a price-to-free-cash-flow ratio of 18 and a price-to-sales ratio of 3.5. The dividend yield is 2.8%, higher than the S&P 500's average yield of 1.2%.

IBM (NYSE: IBM) has emerged as a compelling option for investors seeking AI exposure with a lower volatility profile. The company's stock, which has been down in the last month and quarter, offers a more stable investment compared to high-flying stocks like Nvidia and Microsoft. IBM's free cash flow has surged 55% over the past three years, despite modest revenue growth, making it a cash flow machine in the rapidly evolving AI market.

With a beta value of 0.70, IBM typically moves about two-thirds as much as the market, directionally, providing a smoother ride for investors. This lower beta is a feature, not a bug, offering a more stable investment profile. Valuation-wise, IBM's shares trade at 18 times free cash flow and 3.5 times trailing sales, which are modest valuation ratios compared to the high multiples seen in the AI sector. This suggests that investors are paying a fair, not fanciful, price for IBM's proven cash generation.

IBM's dividend yield of 2.8% is also notable, as it is significantly higher than the S&P 500's average yield of 1.2% and far above the yields of Microsoft and Nvidia. This makes IBM an attractive option for income-oriented investors.

While IBM is not a hypergrowth story, its long-term strategy is paying off. Trailing sales are up by 7.3% over the last three years, but free cash flow has surged 55% higher. IBM's focus on hybrid-cloud and enterprise-AI services, as well as its acquisition of Red Hat, has positioned it well in the AI market. The company's WatsonX AI services are gaining traction, with customers converting pre-adoption tests into solid long-term contracts.

IBM's stock has gained 22% in the last year, or 25% including dividends, making it a compelling investment opportunity. The recent price drop, down by high single digits over the past month and quarter, creates a better entry point than chasing the lofty valuations of Nvidia and Microsoft.

However, risks do exist. IBM's substantial debt leverage is a concern, and if the market decides that every AI-adjacent stock must be priced like an accelerator chip monopoly, IBM may not excite investors. Nevertheless, if the valuation multiples of highfliers continue to compress, investors may rediscover IBM-like stocks with strong cash flows, rich dividends, and low beta values.

In conclusion, IBM offers a more stable AI exposure with a lower-volatility profile, a reasonable multiple, and generous cash returns. It belongs in a balanced AI portfolio, providing a reliable ballast to more exciting rocket stocks.

References:
[1] https://finance.yahoo.com/news/want-ai-exposure-less-volatility-151900126.html
[2] https://www.morningstar.com/stocks/xnys/ibm/quote
[3] https://simplywall.st/stocks/us/software/nyse-ibm/international-business-machines