Why IBM Saw Modest Gains In 2023 Despite Being An AI Powerhouse

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On Monday, IBM (NYSE: IBM) announced a $2.33 billion deal to acquire data integration platform StreamSets and API management/integration platform webMethods. Both platforms belonged to German multinational Software AG as iPaaS (integration platform-as-a-service).Following November’s launch of an AI venture fund worth $500 million, IBM’s latest acquisitions showcase the company’s dedication to hybrid cloud computing and AI solutions. While StreamSets boosts IBM’s existing Watsonx, a commercial generative AI powered by cloud computing, webMethods supplies IBM customers with API tools to manage and monetize multi-cloud environments.

“This powerful combination helps drive innovation while preparing businesses for AI, no matter where applications or data reside,”

Rob Thomas, Senior Vice President, Software and Chief Commercial Officer, IBM

With Software AG’s acquisitions, IBM is becoming a major player in the global data integration software market, poised to grow to $18 billion in 2027 at a compound annual growth rate (CAGR) of 16.1%, per IDC forecast.On its own, IBM has been a less publicly exposed pioneer in machine learning (ML) and artificial intelligence (AI). In addition to open source contributions, such as Adversarial Robustness Toolbox and AI Fairness 360 toolkit (AIF360), IBM has been a key contributor to ML frameworks PyTorch and TensorFlow, both of which served to develop OpenAI’s ChatGPT and other AI models.For investors, IBM provides solid exposure to everything related to AI and cloud computing. But why hasn’t IBM achieved the same stock performance as Microsoft, and is this likely to shift in 2024?

IBM’s Modest Stock Gains Explained
Year-to-date, IBM has underperformed Microsoft (Nasdaq: MSFT) by several orders of magnitude, at +14% and +54%, respectively. This is a divergence in ecosystem cohesion. Microsoft integrated AI into its core services, from Microsoft 365 Copilot to Bing’s DALL-E powered image creator, which is then streamlined into the Microsoft Designer app.Following the temporary ousting of Sam Altman from the ChatGPT board, it looked as if Microsoft would become the dominant player in the AI market, just as it dominates the OS arena with Windows. Microsoft’s Azure cloud computing service is just behind Amazon Web Services (AWS) at 23% global market share.In contrast, IBM has a more fragmented approach to AI and cloud computing rollout. In fiscal year 2022, IBM’s hybrid cloud approach generated $22.4 billion in revenue, representing 11% year-over-year growth. For the same period, Microsoft experienced a 33% revenue growth from dynamics products and cloud services, with Intelligent Cloud up to 30%.For the full fiscal year of 2023, IBM expects 3 – 5% revenue growth, ending with $10.5 billion in free cash flow, which is over $1 billion more year to year.IBM’s next earnings release is scheduled for January 24, 2024, with estimated earnings per share (EPS) of $3.77. In the last quarter of Q3, IBM beat the estimated $2.12 EPS at $2.20 per share. Due to this strong performance, IBM stock has been neck-to-neck with Microsoft, gaining +12% in the last three months.With such equal footing, IBM has an extra incentive for investors – dividends.

IBM Expanding AI Role and More Generous Dividends
Looking at its latest quarterly stock performance, IBM represents a blue chip AI exposure, with a double-digit performance equal to Microsoft’s. However, IBM is offering a much higher dividend yield of 4.09% with an annual payout per share of $6.64. In comparison, Microsoft delivers a 0.81% dividend yield with an annual dividend payout of $3.00 per share. Moving forward, it is safe to say that IBM’s AI role will continue to expand into a more cohesive ecosystem.In addition to SoftwareAG’s webMethods and StreamSet acquisitions, IBM is leading the AI Alliance with Meta, Dell, Sony, Intel, Linux Foundation, and AMD, which launched on December 5th. Not only is the AI Alliance hosting Ivy League universities across the globe, but also NASA.IBM’s partnership with NASA’s Marshall Space Flight Center continues the company’s long-standing relationship with government institutions and big business. IBM helps NASA research climate data and has petabytes of satellite and remote-sensing data for AI app development. With this long view in mind, boosted by generous dividend payout, 11 analyst inputs pulled by Nasdaq place IBM stock as a “buy.” The average IBM price target is $156.71 vs. the current price of $162.90. The high estimate is $179, while the low estimate is $130 per share.More By This Author:Adobe and Figma Mutually Terminate $20B Deal After Regulatory Concerns
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