International Business Machines Corporation (IBM): An Undervalued Tech Stock To Buy Now - InvestingChannel

International Business Machines Corporation (IBM): An Undervalued Tech Stock To Buy Now

We recently compiled a list of the 16 Most Undervalued Tech Stocks To Buy Now. In this article, we are going to take a look at where International Business Machines Corporation (NYSE:IBM) stands against the other undervalued tech stocks.

Artificial Intelligence and Data Centers

Artificial intelligence is the hot center of the technology industry, especially with the introduction of Large Language Models (LLMs) like ChatGPT and Gemini. The AI revolution, which is underway, has affected the semiconductor market and we have seen chipmaker stocks skyrocket with it. However, semiconductor stocks are not the only beneficiaries, data centers also benefit greatly from the surge in AI.

According to Future Market Intelligence, the data center market is estimated at around $30.4 billion during 2024, it is expected to grow at a compound annual growth rate of 14.4% to reach $117.24 billion by 2034. Data centers were in demand before the AI boom as well, with data from Jefferies showing their demand rising 10% to 20% for the last 15 years before AI. However, AI accelerated the market to around 30% in just two years.

The capabilities of data centers and artificial intelligence are revolutionary, but that doesn’t overshadow the energy consumption concerns that come with them. As highlighted by Goldman Sachs Research, data centers consume around 1% to 2% of overall power worldwide, which seems manageable at first. However, they are likely to rise from 3% to 4% in just a decade.

We recently covered 15 Best Data Center Stocks To Buy According to Jefferies, Citi and Wall Street Analysts. It talks about the alarming power consumption challenge that comes with AI and data centers. Here’s an excerpt from the article:

“Naturally, since the US is responsible for ushering in AI, AI energy consumption in America is higher than that in other countries. According to the Boston Consulting Group, by 2030, AI power consumption will account for 16% of all of America’s energy use. It is expected to grow by 15% to 20% annually and touch as much as 130 GW, or the amount of electricity that’s used by 100 million homes. AI chip companies are also aware of these trends, with the latest AI chips promising to improve energy efficiency by 25x. Improving AI performance at the semiconductor level is important especially since some areas where data centers are growing are being forced to turn to coal power to reduce the power gap.”

While the expected power consumption figures are concerning, they also point towards a new market opportunity to introduce “sustainable AI factories”. Tim Rosenfield co-founder and co-CEO of Sustainable Metal Cloud, has introduced HyperCubes, which reduces energy consumption by up to 50%.

HyperCubes contains servers fitted with Nvidia processors, submerged in synthetic oil called polyalphaolefin. Synthetic oil draws heat from the processors more efficiently than air cooling systems typically used in most data centers.

These cubes are being used in Singapore and Australia. Tim Rosenfield mentioned that the technology enables high-density hosting for GPUs and that too sustainably with low energy consumption. The technology is also said to be 28% cheaper to install as compared to traditional cooling systems and is designed to be used in any data center around the globe.

The co-founder of SMC further mentioned that countries like Singapore are looking to push the “green” button for data centers and AI ambitions and the country has committed more than $379.7 million to the cause.

Countries like Singapore, where SMC is headquartered, are also looking to mitigate the hefty energy consumption by pushing for “green” data centers to support its AI ambitions where the country has committed more than 500 million Singapore dollars ($379.7 million). The company has also recently received funding from Singapore state investor Temasek-backed ST Telemedia Global Data Centers, one of Asia’s largest data center operators.

Our Methodology

To curate the list of 16 most undervalued tech stocks to buy now we first identified 50 undervalued tech stocks that were most widely held by hedge funds. We looked at stocks that were trading under 20 times their forward earnings (the market’s P/E multiple is ~23x as of August 28, according to WSJ data), with earnings expected to grow during the year. Once we had an aggregated list of 50 undervalued tech stocks, we ranked them by short percentage of shares outstanding as of 8/15/2024, sourced from Yahoo Finance.

Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

A closeup of a woman’s hands typing rapidly on a laptop in a corporate office setting.

International Business Machines Corporation (NYSE:IBM)

Short % of Shares Outstanding: 2.24%

Number of Hedge Fund Holders: 54

Forward Price to Earnings Ratio as of August 28: 19.58

International Business Machines Corporation (NYSE:IBM) is a pioneer technology company that provides integrated solutions and services globally through its Consulting, Software, Infrastructure, and Financing Segments.

Its Software segment is also involved in hybrid clouds, AI platform integration, and transformation for enterprise use. Whereas, its consulting segment focuses on technology integration, operation integration, and strategy.

International Business Machines Corporation (NYSE:IBM) is leveraging its years of experience and AI enterprise to drive record revenues. CEO, Arvind Krishna was positive regarding the company’s second-quarter results and mentioned that revenue growth and free cash flow generated during the quarter exceeded their expectations.

Revenue grew 4% year-over-year to reach $15.8 billion and the year-to-date free cash flow amounted to around $4.5 billion. International Business Machines Corporation (NYSE:IBM) witnessed a strong performance in its software and infrastructure segments growing 8% and 3%, respectively. Strong performance within these segments was a testimony to the continued success of its hybrid cloud and AI strategy.

Management has infused AI across all its businesses and tools and is leveraging its automation products such as Apptio and Watson Orchestrate to drive growth. The company is in the process of acquiring HashiCorp, for its automation cloud infrastructure which is anticipated to boost its software segment substantially.

As a result of a strong quarter with growth across the board, management has raised its free cash flow guidance to over $12 billion for the year. CEO, Arvind Krishna believes that strong cash generation will allow the company to invest more in innovation to return more profits for the company and shareholders.

IBM is cheap at current levels, it is trading at 19 times its forward earnings, which is an 18% discount to its sector. Moreover, its earnings are also expected to improve by 5.70% to reach $10.17 during the year.

The stock was held by 54 hedge funds with stakes worth $837.6 million. Citadel Investment Group is the top share holder of the company with a position worth $383 million.

Diamond Hill Capital Long-Short Fund stated the following regarding International Business Machines Corporation (NYSE:IBM) in its first quarter 2024 investor letter:

“Among our bottom Q1 contributors short positions in Dick’s Sporting Goods, International Business Machines Corporation (NYSE:IBM) and Palomar Holdings. Though we believe the quality and durability of IBM’s free cash flow-generating capabilities remain questionable, investor sentiment has improved amid optimism for the company’s still-nascent AI product suite.”

Overall IBM ranks 15th on our list of the most undervalued tech stocks to buy now. While we acknowledge the potential of IBM as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for a promising AI stock that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

 

READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.

 

Disclosure: None. This article is originally published at Insider Monkey.

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