IBM stock soared 12% in January. Here’s how:

shares of international business machine (IBM -0.59%) It rose 12.3% in January 2024, according to data from S&P Global Market Intelligence. The 100-year-old computing giant soared after an impressive earnings report, showing that Big Blue’s fundamental bets on cloud computing and artificial intelligence (AI) are starting to pay off.

IBM’s AI-driven business acceleration

The raw numbers in IBM’s earnings report weren’t exactly spine-tingling. Revenues increased 4.1% year over year to $17.4 billion, beating analyst consensus estimates by $80 million. In the end, adjusted earnings rose 7.5% to $3.87 per diluted share, beating the average analyst target by 2%. Although this is a solid result, it is not a report that will change the situation so far.

The truly market-moving news appeared elsewhere in the report. Based on recent and current business trends, IBM management expects next year’s revenue growth to be in the mid-single digits. That’s about twice the growth rate expected by Wall Street experts. Free cash flow is expected to reach nearly $12 billion in 2024, up from last year’s total of $11.2 billion and $1.5 billion more than the company expected three months ago.

But wait, that’s not all. Perhaps the most important and moving part of IBM’s earnings report is its review of the pile of unfulfilled orders for artificial intelligence (AI) services.

By the end of the third quarter, bookings for IBM’s generative AI services and Watsonx AI services were in the “low hundreds of millions,” according to CEO Arvind Krishna’s comments on the company’s earnings call. By the end of December, the indicator had doubled. Most of the new business will consist of consulting services, helping customers install, integrate and get the most out of Big Blue’s innovative AI tools.

In other words, IBM has revealed incredibly strong demand for its AI products. If it wasn’t clear enough before this report, IBM has now been hammered home the message that it is a serious player in the ongoing AI race.

As a result, IBM stock closed the next day’s trading up 9.5%, reaching price levels not seen since 2013.

It’s not too late to hitch your AI wagon to this big blue turtle

I hate to say “I told you so,” but I’ve been trumpeting IBM’s undervalued AI business for months now. Importantly, Big Blue focuses on enterprise-class customers, not consumers, and provides testing, approval, and due diligence reporting between “Hey, this is a cool AI tool” and “Here’s a multi-year contract.” This means adding many layers of This slowdown is enough to hide IBM’s continued growth from most investors.

In short, IBM is climbing the AI ​​mountain more slowly than many of its consumer rivals, but you know the old fable about “slow and steady wins the race.” In this case, the turtles are big and blue, but the stock still looks undervalued despite more than a decade of bearish pricing trends. You can currently buy IBM stock at 2.7 times trailing sales and 13.6 times free cash flow, with a dividend yield pegged at his 3.7%.

In fact, you should consider it before the AI ​​growth spurt really begins.