Shares of International Business Machines (NYSE:IBM), widely known as IBM, have quietly reached 10-year highs, outperforming many peers in the tech sector in 2024. Despite not being at the forefront of the AI revolution like companies such as Nvidia (NASDAQ:NVDA), IBM has still managed to stay relevant, delivering solid returns for its shareholders. As IBM stock continues its upward trend, investors are asking: Is IBM still a buy at these levels? This article will delve into the factors that could influence the future of IBM stock.

IBM Stock: The Bull Case

Strong Dividend Yield

One of the primary attractions of IBM stock is its robust dividend yield. Currently offering a yield of 3.36%, IBM outshines the tech sector median of 1.48%, making it a compelling option for income-focused investors. Compared to its peers like Accenture (NYSE:ACN) and Cognizant (NASDAQ:CTSH), which offer yields of 1.52% and 1.56%, respectively, IBM’s dividend is considerably more generous.

Moreover, IBM has a strong track record of increasing its dividend for 24 consecutive years, placing it on the brink of becoming a Dividend Aristocrat. With a payout ratio of 65.32%, IBM’s dividend growth appears sustainable, further solidifying its appeal to dividend investors.

Solid Fundamentals and Strategic AI Initiatives

IBM’s ability to maintain consistent dividend payments is backed by its strong balance sheet. The company ended its most recent quarter with $16 billion in cash and equivalents, an increase of $2.5 billion from the beginning of the year. Simultaneously, IBM reduced its short-term debt from $6.4 billion to $3.6 billion, showcasing its commitment to financial health.

IBM has also been making significant strides in the AI space, which is crucial for its future growth. The company’s WatsonX AI platform and the Granite family of models address data privacy concerns, a major hurdle for AI adoption in enterprise environments. IBM Consulting’s integration of AI services further enhances the company’s capabilities, making it a critical partner for enterprises seeking customized AI solutions.

IBM’s progress in AI is evident in its doubling of generative AI bookings, from $1 billion in the first quarter of 2024 to $2 billion in the second quarter. Its partnership with Meta Platforms (NASDAQ:META) on the Llama 3.1 model highlights IBM’s role in advancing AI technology.

Quantum Computing Prowess

IBM is also a leader in the field of quantum computing, which could revolutionize industries in the future. The company’s Qiskit platform is designed for companies looking to develop and implement quantum computing solutions. Additionally, IBM boasts the largest operational quantum computer, Condor, positioning it as a frontrunner in this emerging field.

Attractive Valuation

Despite its strong performance, IBM stock remains reasonably priced. It is trading at a forward price/earnings (P/E) ratio of 19.59, which is lower than the tech sector median of 23.77x. The stock’s price/cash flow (P/CF) ratio of 13.59 is also about 38% cheaper than the sector median, suggesting that IBM stock offers value even at its current highs.

IBM Stock: The Bear Case

Tepid Growth Prospects

While IBM’s valuation is attractive, its growth prospects are more modest. Analysts expect IBM’s forward revenue growth to be around 3%, significantly lower than the tech sector median of 6.5%. This slower growth rate could be a concern for investors seeking high-growth opportunities in the tech space.

High Debt Levels

Another potential red flag is IBM’s rising long-term debt, which stood at $52.93 billion at the end of the second quarter, up from $50.12 billion at the start of the year. Although IBM’s current cash flow generation appears sufficient to manage this debt, the high debt level could strain profitability if interest rates rise or if the company faces financial headwinds.

Challenges in the Cloud and Consulting Sectors

IBM’s acquisition of Red Hat was intended to position the company as a major player in the cloud market. However, IBM has struggled to gain significant market share, with industry leaders like Amazon’s AWS and Microsoft Azure maintaining dominance. Additionally, IBM’s consulting segment reported a 1% revenue decline in Q2 2024, signaling potential challenges ahead.

Analyst Verdict on IBM Stock

Given the mixed outlook, it’s not surprising that analysts are cautious about IBM stock. Out of 15 analysts covering the stock, four rate it as a “Strong Buy,” one as a “Moderate Buy,” eight as a “Hold,” and two as a “Strong Sell.” The average price target of $188.47 suggests limited upside, with the highest target at $220, implying an 8.8% gain from current levels.

Conclusion: Is IBM Stock a Buy?

IBM stock remains an intriguing option for dividend investors and those seeking exposure to AI and quantum computing. However, its slow growth and high debt levels warrant caution. Investors should weigh the potential rewards against the risks before deciding whether IBM stock is a buy at its current 10-year highs.

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