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Want AI Exposure With Less Volatility? This Stock Is a Top Choice.
IBMIBM(US:IBM) The Motley Foolยท2025-08-24 15:19

Core Viewpoint - The article suggests that instead of chasing high-flying AI stocks like Nvidia and Microsoft, investors should consider IBM as a calmer investment option that focuses on cash flow and dividends. Company Overview - IBM has transitioned from being perceived as a mainframe and punch card company to a hybrid-cloud and software company with a significant enterprise-AI services segment [3] - The company is recognized as a cash flow machine in the rapidly evolving AI market, emphasizing the importance of consistent cash flow over high growth narratives [4] Financial Metrics - As of August 22, IBM's beta value is 0.70, indicating it typically moves about two-thirds as much as the market, making it a calmer investment option [5] - IBM's shares trade at 18 times free cash flow and 3.5 times trailing sales, suggesting a fair valuation compared to other high-flying AI stocks [6] - The dividend yield for IBM is 2.8%, which, while lower than its historical average of 4.3%, is significantly higher than the S&P 500's average yield of 1.2% and far above Nvidia and Microsoft's yields of 0.02% and 0.7%, respectively [7] Growth and Cash Flow - IBM's trailing sales have increased by 7.3% over the last three years, which is modest compared to the growth rates of Microsoft and Nvidia [9] - However, IBM's free cash flow surged by 55% during the same period, supported by a strong long-term strategy that includes Red Hat as the foundation for its cloud-centered AI strategy [10] Market Position and Trends - Adoption of IBM's WatsonX AI services is increasing, with pre-adoption tests converting into long-term contracts, indicating a positive trend in customer engagement [11] - IBM's stock has gained 22% over the last year, or 25% when accounting for dividends, despite a recent decline that presents a better entry point for investors [12] Investment Strategy - The article suggests that as high-flying AI stock valuations compress, investors may rediscover stocks like IBM that offer strong cash flows, rich dividends, and low beta values, making them appealing to risk-averse investors [13] - IBM is positioned as a reliable addition to a balanced AI portfolio, providing enterprise AI exposure with lower volatility and reasonable multiples while offering generous cash returns [14]