The latest company to jump on the “Build America” bandwagon is International Business Machines Corp. IBM. The historic tech giant gets a large portion of its revenue from cloud and mainframe computing.
Now, the company plans to invest $150 billion over the next five years, with about $30 billion going to mainframe and quantum computing.
Still, despite CEO Arvind Krishna’s shift in technology focus toward cloud and mainframe businesses, IBM remains a slow-growth company. Since Krishna took over in April 2020, IBM stock has outperformed the broader market, but these investments don’t necessarily enhance the investment value of IBM stock.
Red Hat’s Dividend Fading
Admittedly, the investment could be transformative for IBM. The company is on pace to spend just $321 million in capital expenditures in the first quarter of 2025 and just $1.1 billion in 2024. So plans to invest an average of $30 billion per year over the next five years could bring big changes to the business.
The move could be a boost to IBM bulls who are perhaps pleased with Krishna's shakeup of the company but disappointed with the current growth rates. Thanks to its $34 billion acquisition of Red Hat in 2019, IBM is a leader in hybrid cloud and has made key advances in artificial intelligence.
In addition, investments in supercomputing could make it a leader in supercomputing and, as the technology gains prominence, it will also take a leading position in quantum computing.
Still, first-quarter revenue of $14.5 billion was up just 1% year-over-year. While the software division saw an 8% revenue increase in the same period, the company's other three divisions all saw revenue declines.
This could mean that IBM will have to improve results across most of its businesses to maintain share price growth. While a 40% share price increase bodes well for IBM, its 41x P/E ratio could limit its near-term growth if it doesn't improve significantly.
AI and Performance
AI is both a useful and extremely complex technology. AI agents take both of these qualities to a new level. Rather than following detailed instructions, these AI programs pursue set goals autonomously. They break work into several smaller tasks and can take multi-step problem-solving actions to reach their goals.
I guess anyone could manage a few of these AI agents. But what if your business deploys them at scale? A virtual army of specialized AI agents can do a lot of work and even collaborate when project goals intersect. Training, locating, and tracking these agents can quickly become difficult.
That's where IBM comes in. Big Blue just released an AI agent management platform called Watsonx Orchestrate. The tool will help enterprise-level companies create, direct, and evaluate the performance of AI agents. It even leverages the Watsonx.data system to select the right business data for each AI agent project.
On top of that, the IBM Watsonx Orchestrate platform will be available in June 2025. It’s not designed for hobbyists or small businesses, but for deep-pocketed enterprise customers. This heavyweight solution can run on IBM’s mainframe systems or on an interconnected network of high-end x86 servers.
This makes sense, as customers will also need some powerful hardware to run the final AI agent. Keeping the entire setup close to the customer’s most important business data also puts the entire orchestration system at the heart of the data center.
Users can track how data flows through the system, from raw sensor output and sales trends to actionable business recommendations. Building new AI agents takes just minutes, thanks to a host of predefined templates. The entire system is wrapped in tight data security—you won’t find Watsonx Orchestrate’s AI agents leaking sensitive business information outside the office.
So Wall Street isn’t necessarily seeing this as a game-changing product launch, but that could be a mistake. Other tech giants are sure to roll out their own AI agent management tools, but I don’t think they’ll be able to deliver on IBM’s rigorous focus on data quality and security. IBM claims that 90% of enterprise data is unstructured, scattered across messy systems like emails or video presentations. Bringing that mess together into big language models can make it all searchable and easy for AI agents to analyze — but most companies are just beginning to explore that idea.
Watsonx Orchestrate and its AI agents can help, and I think it will be a significant business driver in the coming years. IBM’s AI strategy is one of those overnight successes that took years to build, and it’s in the growth phase of innovation right now.
IBM’s Goals
IBM generated $12.7 billion in free cash flow on $62.8 billion in revenue last year. But AI-driven businesses are growing fast, and I can’t wait to see how Watsonx’s business plays out in the future.
Even if its cash flow-based valuation doubles, this stock still looks like a bargain compared to Amazon or Microsoft. Just like IBM's business model, investors are slowly embracing this unsung AI hero. That's good because it gives me more time to buy IBM shares at bargain prices.
Given IBM's record highs and its growing status as a cloud and AI stock, one has to think that IBM has managed to rebound strongly under Krishna's leadership. And that success has also brought rich gains to its shareholders.
In fact, if IBM can revive or sell its stagnant consulting and infrastructure businesses, its results may improve. Nonetheless, revenue forecasts strongly suggest that the cloud and AI businesses have revived IBM as a force in the tech industry, which means that if IBM's valuation is below the average of the S&P 500, investors may want to consider buying the stock.
